The telecom industry is a challenging one to navigate, characterized by substantial investments in physical infrastructure and significant costs for bandwidth rights, often auctioned by the government. These expenses can soar into billions, with technological advancement only escalating investment demands. As we transition from 4G to 5G, several providers find themselves grappling with stretching their financial resources to keep up with evolving developments.
Consequently, there is a noticeable trend towards consolidation in the sector. Due to the high costs involved in establishing and maintaining networks, scale and efficiency become paramount. Interestingly, geopolitical concerns also play a significant role, as nations are wary of foreign interference in crucial infrastructure like wireless networks. This scenario ultimately leads to a few companies, often state-owned, dominating national telecom networks.
Take Thailand, for instance, where the second and third-largest wireless operators have recently merged, leaving consumers with limited options. Similarly, Malaysia has entrusted a state-run entity, Digital Nasional Berhad, with the development of its national 5G network. Currently, Indonesia’s telecom sector is also witnessing consolidation, with two leading carriers planning a merger in 2025.
XL Axiata, Indonesia’s third-largest wireless carrier and part of the Axiata Group, is majorly owned by the Malaysian government through various investment funds, including Khazanah Nasional Berhad. As of 2023, XL Axiata boasted 57.5 million Indonesian customers, amounting to approximately 16 percent of the market for wireless subscribers. The company’s after-tax profit stood at $80 million on $2 billion in revenue.
Axiata is set to merge with Indonesia’s fourth-largest wireless provider, Smartfren, the telecom wing of the Indonesian conglomerate Sinar Mas. Despite its subscriber base of 36.5 million or 10 percent of the market, Smartfren reported a loss of $7 million in 2023. This financial strain likely prompted Sinar Mas to seek new avenues.
According to Reuters, Axiata and Sinar Mas will each own 34.8 percent of the new merged entity. Given Axiata’s higher value, Sinar Mas will pay nearly $500 million to gain equal ownership. This merger will combine customer bases and network infrastructure, controlling around a quarter of the market, while reducing capital investment for maintenance and expansion.
Indosat, the second-largest telecom company, is profitable with $298 million in earnings on $3.2 billion in revenue in 2023. With nearly 100 million subscribers, Indosat holds about 28 percent of the market. The merger between XL Axiata and Smartfren is likely aimed at competing with Indosat for the second spot.
However, the industry leader, Telkomsel, seems unshakable from its top position. It recorded $6.4 billion in revenue in 2023, with 159 million subscribers, holding a strong 45 percent of the market.
The trend towards consolidation in telecommunications globally, along with the high costs of establishing and maintaining national 5G networks, makes the shrinkage of Indonesian telecom space from four to three major players unsurprising. It also explains why Smartfren, despite its financial losses, is eager to merge with a more profitable telecom company like XL Axiata. The impact of this merger on consumers is yet to be determined, but it’s a question being raised increasingly as industry concentration continues to grow.
