T

he end of the year saw gridlock over the telecommunications infrastructure sharing debate.

Communications and Information Minister Rudiantara supports the policy for the sake of economic efficiency whereas State-Owned Enterprises Rini Soemarno opposes the plan out of concern about potential deterioration of investment activities.

Minister Rudiantara stated that to boost internet quality in Indonesia to be the second best in Asia by 2019, an additional US$10 billion investment was required. By implementing this policy, operators will spend $3 billion less.

Minister Rini claims that companies investing their money in underserved areas have high risks ranging from demand uncertainty and opportunity cost of capital.

To achieve a consensus, we need an evidence-based analysis, which can serve as justification encompassing theoretical concepts and empirical analyses as well as itemizing the cost and benefits of such a policy.

Nicholas Economides (2009), a network economist of New York University, explained how infrastructure sharing might affect industry profit based on the competition effect and network effect due to new entrants in the industry.

The competition effect happens when the increasing number of competitors reduces profit of the incumbent. Conversely, the network effect happens when the industry foresees greater profit due to a greater network size as additional operators join.

A short-term mind-set usually leads to the fear of losing money, but when all aspects are put together, the whole industry might benefit from a greater network. Additional players in the telecommunications industry could benefit the industry provided that the network effect outweighs the competition effect.

When Sweden introduced deregulation in telecommunications in the late 1990s, it quickly reaped the benefits of a greater network size. The Swedish telecommunications industry has since featured a higher number of new entrants as compared to its neighbors in Europe.

Sweden’s industry greatly improved 10 to 15 years after deregulation. The current industry offers high-quality broadband services and affordable prices thanks to stiffer competition.

Japan enforced deregulation as well. A crucial stage occurred in 1985 when the government introduced New Common Carriers (NCC) in Type I and Type II. Type I uses its own telecommunications infrastructure, while Type II provides telecommunication services using Type I infrastructure. The development of Type II entrants was enormous: 768 Type II NCCs existed by 1999.

This phenomenon also happens in developing countries, such as Bangladesh, India, Malaysia, Thailand and Vietnam. So, what might motivate Indonesia to implement such a policy?

At the industry level, according to the Bank of America Merril Lynch Global Wireless Matrix, the Herfindahl-Hirschman Index (HHI) of Indonesia’s telecommunications industry — an index measuring the completion level of an industry — was about 0.351 as of 2013.

The United States Department of Justice considers a market with an HHI of less than 0.15 to be a competitive marketplace, between 0.15 to 0.25 to be moderately concentrated and greater than 0.25 to be highly concentrated. Thus, Indonesia’s telecommunications industry is very concentrated compared to India at 0.178, Bangladesh at 0.293, Malaysia at 0.336 and Thailand at 0.339, but it is far less concentrated than the Philippines at 0.564.

Internet data revenue of Indonesian operators is about 41 percent of total average revenue per user (ARPU), which is the highest among comparable countries: Malaysia at 38 percent, Thailand at 22 percent and India at 15 percent.

These figures might lead to a conclusion in favor of the competition effect thus preventing network sharing. As the current industry emphasizes internet data over voice calls or SMS, the incumbent has the right to be skeptical toward sharing infrastructure.

Even with the current competition level, data revenue has reached half of the total service revenue indicated in the soon-to-be-saturated demand for internet data compared to other countries where data revenue is still low. Logically, if they allow other operators to join, it will push the revenue down even further.

However, owing to the network effect, we can also foresee great potential should the government introduce infrastructure sharing. As of 2013, the smartphone penetration rate in Indonesia grew at 35 percent, which was lower than Malaysia at 52 percent and the Philippines at 44 percent. Indonesia’s ARPU at $3.4 is far lower than Thailand at $8.4 and Malaysia at $16.17.

As a result of the decreasing trend in prices of smartphones, we can expect that the penetration rate of smartphones in Indonesia will grow followed by an increased demand for internet data. This will increase network size and total ARPU.

In Indonesia, the network effect seems to outweigh the competition effect supporting the idea to implement network infrastructure sharing.

However, as a precaution, the regulatory body should introduce the ladder of investment principle, promoting service based competition by sharing networks (Cave, 2006). Once entrants have obtained a sufficient consumer base, they are expected to move up to build their own facilities. Nevertheless, this policy requires constant monitoring and evaluation by a credible regulatory authority.
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The writer is a research fellow at the United Nations University Operating Unit on Policy-Driven Electronic Governance (UNU-EGOV) living in Guimarães, Portugal.