The wireless telecom business is not an easy one to be in. It requires huge investments in physical infrastructure as well as large outlays for bandwidth rights, which are usually auctioned off by the government. These costs easily reach into the billions of dollars, and as the pace of technological progress quickens so do investment demands. As networks move from 4G to 5G, a lot of providers are finding themselves stretching their balance sheets and cashflow just to keep up with the latest developments.
As a result, there has been a trend toward increased consolidation in the industry. When the costs involved in building out and maintaining the network are so high, economies of scale and efficiency become very important. The telecom sector is also increasingly influenced by geopolitical concerns, as states worry about foreign influence in critical national infrastructure like wireless networks. This means just a handful of companies, many with state ownership, end up controlling the lion’s share of national telecom networks.
In Thailand, the second and third largest wireless operators recently merged, leaving consumers with essentially just two choices. Malaysia created and tasked a state-run entity called Digital Nasional Berhad with developing its national 5G network. And now Indonesia’s telecom sector is experiencing consolidation, with two big carriers announcing a plan to merge in 2025.
XL Axiata is the third largest wireless carrier in Indonesia. They are part of the Axiata Group, which is majority owned by the Malaysian government through various investment funds, including Khazanah Nasional Berhad. XL Axiata had 57.5 million Indonesian customers in 2023, roughly 16 percent of the market for wireless subscribers. The company posted an after-tax profit of $80 million on $2 billion in revenue.
Axiata plans to merge with Indonesia’s fourth largest wireless provider, Smartfren. Smartfren is the telecommunication arm of homegrown conglomerate Sinar Mas, which is the majority owner of Asia Pulp & Paper and has interests across the Indonesian economy from real estate to agribusiness. Sinar Mas Land is the developer behind upscale satellite city Bumi Serpong Damai on the outskirts of Jakarta.
Telecom is a relatively minor part of Sinar Mas’ business empire, and not a particularly lucrative one. Smartfren, which has 36.5 million subscribers or 10 percent of the market, posted a loss of $7 million in 2023. It’s the company’s second loss in three years, over which time no dividends have been paid and cash is dwindling. So it’s not surprising that Sinar Mas would be on the lookout for a new direction.
According to Reuters, Axiata and Sinar Mas will each hold 34.8 percent of the new entity. Because Axiata is the more valuable company, Sinar Mas will have to pay almost $500 million to become an equal co-owner in the new venture. But by combining customer bases and network infrastructure, the new company will control around a quarter of the market right off the bat, while reducing the amount of capital investment needed to maintain and expand coverage. It also means if the deal is approved by regulators, it will leave just three major telcos in the market.
The second largest is Indosat. Qatar’s Ooredoo and Hong Kong’s Hutchinson became the majority shareholders in 2022, and the firm is reliably profitable with $298 million in earnings on $3.2 billion in revenue in 2023. With just under 100 million subscribers, Indosat holds about 28 percent of the market. By merging, XL Axiata and Smartfren likely hope to draw even with Indosat and compete for second place.
There is little chance that any combination of mergers of deep-pocketed international investors will dethrone Telkomsel from its leading position atop the industry. Telkomsel recorded $6.4 billion in revenue in 2023, more than the other three telcos combined. And with 159 million subscribers, Telkomsel has a commanding 45 percent of the market. They also have the added advantage of being majority owned by the government of Indonesia (the other 35 percent being held by Singapore’s Singtel), and are one of the most consistent contributors of dividend payments into the state budget.
Given the global trend toward consolidation in telecommunications, as well as the large anticipated costs of building and maintaining national 5G networks, it is hardly a surprise that the Indonesian telecom space is set to shrink from four to three major players. It is also pretty clear why Smartfren, which has been losing money while trailing the rest of the pack, would look to tie itself to a bigger and more profitable telco like XL Axiata – even if it has to pay upfront in order to do so. Whether the merger will be good for consumers is less clear, and is a question that is being asked more and more often these days in Indonesia and elsewhere as the drive toward ever-greater industry concentration marches on.