Document(s) 10 of 21

INTRODUCTION

Wireless Internet technologies have the potential to bridge the digital divide between countries and regions that have well developed telecommunications infrastructure and those that do not. The Internet has the potential to improve the lives of people, especially in hard to reach areas outside urban centers. Given the necessary infrastructure, a wide array of interactive multimedia solutions—from government services, to education, to commerce—can be brought to these usually underserved areas. However, such areas are typified by poor infrastructure and connectivity.

It is precisely in places where infrastructure is poorly developed that wireless networking, particularly the Institute of Electrical and Electronic Engineers (IEEE) 802.11x standards, popularly referred to as Wi-Fi, can be viable solutions that allow leapfrogging of some parts of the traditional wired network to connect people in far flung villages to each other and to the wider world via the Internet. The fast declining costs of wireless technology along with the embedding of Wi-Fi chipsets in a variety of mobile devices, including mobile phones, can potentially extend some form of broadband Internet connectivity to difficult areas of the world (Wireless Internet Institute, 2003).

However, the challenge of bridging the digital divide has been less an issue of finding and deploying the right technologies and more of finding ways to overcome institutional, regulatory, and market barriers to satisfy connectivity needs.

Despite the overwhelming benefits of Wi-Fi for rapidly extending connectivity, only 41 percent of developing countries allow license-exempt wireless spectrum for Wi-Fi, compared to 96 percent of developed countries (Wireless Internet Institute, 2003). Developing countries lag in Wi-Fi-enabling regulations because they are yet to carry out necessary regulatory reforms which will transform their telecommunications sectors from those dominated by government-operated monopolies to those with workable competition. Where incumbents have been partially privatized, the government continues to retain controlling shares in the operator. Where regulators have been appointed, they have been undermined by undue interference. In these countries, the regulatory environment is not conducive to license-exempt bands that allow a panoply of services, including voice, to be provided by wireless, circumventing the legacy infrastructure of the incumbent. It is understandable that incumbents who have invested in a wired infrastructure would be hostile to any 'disruptive' technologies that can loosen their hold (Wireless Internet Institute, 2003). What is less understandable is why incumbents who have not invested in rural areas and in data services are still hostile to Wi-Fi.

THE WI-FI POTENTIAL

Although wireless local LANs were in existence before Wi-Fi standards were established, communication among wireless equipment manufactured by different vendors was often not possible (Kharif, 2003). In 1990, under the aegis of the IEEE, a group was formed to develop common wireless standards. After the IEEE 802.11 standard was published in 1997, vendors developed Wi-Fi equipment around two variants of the 802.11 standard: 802.11b (operating in 2.4 GHz band) and 802.11a (operating in 5.8 GHz band) by early 2000. Other variants of the 802.11 standard were developed over time, offering higher bandwidth for data transmission, as shown in Table 6.1.

The potential of Wi-Fi in developing countries goes beyond homes and urban centers, which have been the preferred sites of deployment in developed countries. The very features that make it popular in developed countries make Wi-Fi attractive for bridging the digital divide: its ease of set-up, use, and maintenance; its relatively high bandwidth; and, most importantly, its relatively low cost. High demand for Wi-Fi equipment has brought down unit costs (Pentland, Fletcher and Hasson, 2002); Wi-Fi routers and cards retail below USD 80 each.

Table 6.1
Wi-Fi Standards

Using antennae and repeaters, the range of a Wi-Fi connection can be extended from 50 m to 20 km (Pentland, Fletcher and Hasson, 2002). With this kind of range and low deployment costs, Wi-Fi technology opens up new possibilities for providing rural connectivity.

In one 'wireless' leap, Wi-Fi offers countries the opportunity to connect regions that currently lack wire-line infrastructure; it can also help to connect difficult-to-wire terrain to provide cost-effective connectivity to farmers, traders, and fishermen who live outside urban centers. Not only are Wi-Fi networks significantly cheaper than wired networks, they can be built without obtaining permits and laying cables.

However, Wi-Fi has a number of limitations. It is prone to interference from other Wi-Fi networks in the vicinity and other devices like Bluetooth, cordless phones, microwave ovens, etc., which use the same frequencies. Interference degrades network performance and affects reliability. Furthermore, there is a steep range/bandwidth trade-off, the further one is from the wireless access point. For the above reasons, Wi-Fi cannot provide carrier-class reliability that one expects from fiber optic or microwave links that transport data at high speed and over large distances. It is precisely for this reason that Wi-Fi by itself cannot be a connectivity solution for an entire country. It still requires a link to a high-performance fiber optic backbone. At best, Wi-Fi is effective as an access network for providing last-mile connectivity and as a low-capacity, backhaul network for carrying data over 5 to 10 km, as cases from around the developing world show.

Wi-Fi Deployment in Developing Countries

The number of developing countries that have unlicensed the 2.4 GHz band for Wi-Fi services are increasing although their numbers are still small. For example, most of ASEAN and SAARC countries require some form of licensing for deploying Wi-Fi technology (Open Spectrum Foundation, 2006). Among developing countries that have deployed Wi-Fi, coverage is limited to a few localities or regions with a few exceptions.

In India, the unlicensing of the Wi-Fi frequencies saw a sharp growth of wireless hotspots due to private investment. However, the earliest deployment of Wi-Fi in India was made on an experimental basis in rural localities under the DakNet project. This project used the 'store-and-forward' system that asynchronously connected villages via a bus that was equipped with a wireless access point, pioneered by First Mile Solutions (FMS).¹ By and large, the growth of Wi-Fi deployment in India remains concentrated in a few urban centers and the benefits of wireless technologies are still to be leveraged in a significant manner for rural access.

FMS has deployed variations of the store-and-forward system in a number of countries including Rwanda and Cambodia. In countries where FMS' store-and-forward system has been deployed, they were made on a small-scale, experimental basis, in most cases with donor funding.

Indonesia stands-out among developing countries in terms of Wi-Fi deployment not only because of the extensive deployment of this technology over a large geographical area but also because this innovation arose from endogenous factors.

WI-FI DEPLOYMENT IN INDONESIA

Indonesia is the world's largest archipelagic state with more than 17,000 islands. Among the major inhabited islands are Java, where 60 percent of Indonesians live, Sumatra, Kalimantan, Sulawesi, and Papua. Out of a total area of 9.8 million sq km, 81 percent is sea. These physical characteristics pose major challenges to rolling out communication infrastructure.

Wi-Fi deployment in Indonesia is unlike any of the cases outlined in developing countries in the previous section. As early as 1996, before common standards for wireless local LAN were developed, Indonesian Internet Service Providers (ISPs) were using wireless links for back-hauling their data (Simanjuntak, 2005). Long before the 2.4 GHz band was unlicensed in Indonesia, Wi-Fi was deployed in more than 40 towns and cities² in different islands (Augustine and Sunggiardi, 2005).

Interviews with representatives from Indonesian Wireless Internet Community (INDOWLI), Association of Computer Businesses (APKOMINDO), and Association of Cybercafés (AWARI) suggest that the geographical coverage of Wi-Fi is approximately 60 percent in Java, 30 percent in Sulawesi, 35 percent in Sumatra, and 5 percent in Papua. Not only is the Wi-Fi coverage more than most developing countries in absolute and relative terms, they have been funded by small entrepreneurs. It is the small and medium-sized ISPs rather than the big telecom operators who have invested in wireless networks.

The advantages of Wi-Fi in providing cost-effective connectivity were discussed earlier. Based on the above rationale and from the evidence of extensive Wi-Fi deployment in Indonesia, one would expect Internet penetration and growth to be high in the country. But the evidence presented in Figure 6.1 indicates otherwise. Within the Association of Southeast Asian Nations (ASEAN), Indonesia ranks in the bottom half for Information and Communication Technologies (ICTs). Its Internet subscriber penetration for the year ending 2005 was 0.39 subscribers per 100 inhabitants.

Figure 6.1
ICT Penetration in ASEAN Countries (2004)

Source: ITU (2005).

Wi-Fi deployment in Indonesia has not led to higher Internet penetration, compared to other developing countries. Not only is the Internet subscriber base in Indonesia significantly lower than in its ASEAN counterparts, it is also lower than the ASEAN average. When compared to India, which is also large in size and population and with similar per capita income (Indonesia USD 3,500, India USD 3,100, PPP adjusted), Internet growth in Indonesia is also lagging behind, as can be seen from Figure 6.2. In an eight-year period (1998 to 2005), Indonesia's Cumulative Average Growth Rate (CAGR) for Internet users was 41.2 percent compared to 73.8 percent in India.

Figure 6.2
Internet Subscribers: Indonesia vs India (1998–2005)

Source: Author, based on data provided by APJII and ISPAI.³

It is evident that regulation or policies designed to leverage the low-cost and leapfrogging capabilities of Wi-Fi for achieving greater access have not been implemented in Indonesia. In fact, until January 2005, Wi-Fi deployment was illegal in Indonesia which altogether ruled out a government or regulator role in promoting this technology. The anomaly can only be explained by looking at the context within which Indonesian ISPs deployed Wi-Fi.

Barriers to Internet Growth in Indonesia

From the beginning, Internet growth in Indonesia has been driven by private/non-governmental initiatives, as detailed in Chapter 4.

One of the biggest barriers to Internet development was the high cost of connectivity to the international backbone and domestic leased lines, where they were available. These expenses constituted 60 to 80 percent of an ISP's total monthly cost. Heru Nugroho, former Secretary General of Indonesia's ISP Association APJII, estimated that on an average, ISPs spent about USD 50,000 for international Internet bandwidth per year before the Internet Exchange was established ('Bisnis Indonesia,' 2004b). According to him, bandwidth and networking costs typically represent 25 percent of the total costs of ISPs in other countries.

The high cost of international bandwidth was further exacerbated by the absence of a national Internet exchange. Each of the 35 ISPs had separate international connections to connect to the Internet backbone. Local traffic destined for addresses within the borders of Indonesia was also routed through the Internet backbone and incurred international bandwidth charges. Government initiatives to rectify the local bandwidth and connectivity problems were stalled by the Asian economic crisis in 1997. The government agreed to let the Internet association take the lead in building Indonesia's Internet backbone (Wagstaff, 1999). Led by APJII, a task force was created to develop an Indonesian Internet exchange. It came into operation in 1997.

Theoretically, ISPs could connect from their point-of-presence (PoP) to the Internet Exchange (IIX) by leasing a line from the incumbent. However, in 1997, PT Telkom, the incumbent fixed line operator, did not make leased lines available to ISPs (Allen, 2005).

In the absence of both build and buy options, ISPs decided to continue using the Wi-Fi frequencies, even though it was illegal. The relatively low cost of wireless infrastructure meant that the exposure to risk, in the form of confiscation or closure of the network, was also low.

This peculiar form of Wi-Fi deployment emerged from necessity, not choice. When PT Telkom made leased lines available, the prices were so high that ISPs decided to continue using the Wi-Fi links. Wi-Fi was used in Indonesia both as a backhaul link over long distances and for last-mile access.

Wi-Fi 'Innovation' in Indonesia

The typical ISP network can be divided into an access and infrastructure network, as can be seen in Figure 6.3 (Huston, 1999). In the infrastructure network, ISPs are connected to each other (peers) via a fiber backbone for exchanging traffic and to connect to a higher tier ISP to link to the Internet backbone. From their PoPs, ISPs may either use twisted copper pair, coaxial, or fiber optic cable to connect to the curb. The last meters to the customer premises are connected typically via twisted copper pair or coaxial cable. The end service that is delivered may be dial-up, ADSL or cable-based Internet. Typical use of Wi-Fi would be at the edge of the network, as a wireless residential network with a limited footprint.

Figure 6.3
Typical ISP Network Architecture

Source: Author.

The network architecture of an Indonesian ISP is typical, as can be seen in Figure 6.4. The ISPs peer with each other via an Internet exchange to which they connect using a variety of methods, including Ethernet, microwave leased line, or Wi-Fi. Wi-Fi, especially at the 5 GHz band, which continues to be licensed and hence is less prone to interference, is used (illegally) in the infrastructure component of the network to haul traffic from the ISPs' PoPs to the curb. From the curb, the ISP may link wirelessly to a large customer like a school or a cybercafé using 2.4 GHz frequencies.

Figure 6.4
Indonesian ISP Network Architecture

Source: Author.

For providing Internet service to neighborhood networks that connect individual houses, ISPs typically use an Unshielded Twisted Pair (UTP) cable to wire the homes, because of the cost savings from using an Ethernet card with the wired option instead of the more convenient but more expensive Wi-Fi access card.

A large customer like a school with a 1 Mbps Internet link will in turn become an ISP by connecting other schools, corporate customers and neighborhood networks. This many tiered retailing of Internet service is necessary to recoup the high retail prices for Internet access. This also explains why more than a third of ISPs operating in Indonesia do so without a license.

A number of factors make Wi-Fi deployment in Indonesia unique. Unlike in the West, Wi-Fi is not deployed primarily as a network for the home but is rather used as an access network to connect large customers such as schools and cybercafés. There is also a blurring of the access and infrastructure network as the wireless link is deployed as a low-capacity backbone to carry data over large distances. Reversing common wisdom, the ISPs use aerial cable to connect homes rather than Wi-Fi because it is cheaper to deploy the former. Finally, because of the lowcost and ease of setting up a wireless network, anyone with bandwidth can and will become an ISP, especially when exorbitantly high retail prices have to be recouped.

A business customer for dedicated Internet access typically pays about USD 4,000 per month for a 2 Mbps link to the IIX and a 512 Kbps international link to the Internet backbone. In order to recoup this high cost, a business customer interviewed for this study became an unlicensed ISP and provided Internet service to 129 customers, which included five schools, 20 Internet cafés, and neighborhood networks connecting 104 homes.

For this Internet service, each school was charged USD 100 per month, each cybercafé USD 200 per month, and each individual house around USD 35. In this instance, not only was the business customer able to cover its costs comfortably but in terms of customers, it was a larger ISP than the licensed upstream provider!

'Unlegal' activities⁴ were not restricted to the use of the 2.4 GHz and 5 GHz bands for Wi-Fi. Because of high local and international backbone costs, it is sometimes cheaper for ISPs to connect to the Internet backbone directly via satellite, bypassing Indosat's international gateway and avoiding payments for local leased lines. In most cases, direct access to a satellite link by ISPs is considered illegal since not all satellites have landing rights in Indonesia. Representatives from APJII have argued that if bandwidth prices were to fall in the country, the margin between the legal bandwidth price and the illegal will be narrowed, and ISPs will have a greater incentive to avoid the grey market (APJII—Internet Service Provider Cost, 2003).

From the discussions with ISPs and large customers like schools, it was evident that cost factors were the primary reasons why Wi-Fi has been used extensively in Indonesia. The licensing framework also played a part in the choice and will be discussed in greater detail later. The next part will unpack the cost factors.

Leased Lines and International Bandwidth Prices

By any measure, the retail price of USD 4,000 per month for a 512 Kbps Internet link is very high. When that price is seen in relation to the per capita income of Indonesia, it is astronomical. By examining the cost components of the ISPs, one can gain a better understanding of why retail prices are so high. The two major variable cost components of an ISP operating in Indonesia are the cost of domestic leased lines and international bandwidth. In order to determine whether leased line prices or international bandwidth prices are 'high' in Indonesia, it is necessary to compare them with other countries in the region and with international benchmarks.

As can be seen in Table 6.2, a 2 Mbps leased line for a 2 km link provided by an operator costs USD 18,000 a year in Indonesia (48 times that of India).5 Indonesian prices are four times the EU benchmark price. For the 200 km link, the ratios indicate that Indonesian prices are five to six times the EU benchmark and the price in India.

Indonesian international bandwidth prices are also significantly higher. As can be seen in Table 6.3, the price of a 2 Mbps full-circuit international link in Indonesia is four to five times the price charged in India.

Table 6.2
Comparison of Annual Domestic Leased Line Prices: Indonesia, India, and EU Benchmark (2005)

Table 6.3
Comparison of Annual International Full-Circuit Prices to US West Coast in India and Indonesia: Prices (USD) and Price Ratios

Even when compared to its Asia-Pacific peers, Indonesia's leased line prices are on the higher side as can be seen in Figure 6.5.

Since leased lines are a critical producer good for ISPs, high leased line prices naturally result in high retail prices for Internet services. As can be seen in Figure 6.6 and Table 6.4 comparing ADSL prices, retail price for Internet services are between four to five times more expensive in Indonesia than India.6

Innovating around Constraints

The Indonesian case is an example of innovation around constraints. The inadequate supply of network infrastructure, both of backbone and leased lines, resulted in Wi-Fi being chosen as a substitute for filling the 'missing links' in the network. The high price of domestic leased lines meant that ISPs and others relied on a more cost-effective solution in the form of Wi-Fi links. The high price of international bandwidth saw ISPs connecting directly through satellites to the Internet backbone. The high retail price of Internet service spawned a large number of unlicensed reseller-ISPs using Wi-Fi to recoup the high price.

Figure 6.5
Annual Leased Line Prices for 2 Mbps, 2 km Circuits for Asia-Pacific Countries (2005)

Source: Author, based on data provided by operators in Pakistan, India, Bangladesh, Sri Lanka, and Indonesia, Badan Regulasi Telekomunikasi Indonesia (BRTI) leased line study, Commission of European Communities (2005).

Figure 6.6
Comparison of Monthly Internet Prices for Business Users in Indonesia and India (2005)

Source: Author, based on data provided by Indonesian ISP, Indian ISP.

Table 6.4
Comparison of Monthly ADSL Retail Prices in Indonesia and India: Prices (USD) and Price Ratios (2005)

The question of why Indonesia has more Wi-Fi deployed than most developing countries has been partially answered. Initially, ISPs were not given build or buy options; they were not allowed to build infrastructure; yet the incumbent did not provide leased lines. It is possible that PT Telekom did this to prevent potential competition from ISPs in the Internet service market and in the voice market with the possible use of VoIP. But it is also possible and likely, as will be ex-plored in greater detail later, that PT Telkom did not have adequate infrastructure on the ground to provide leased lines to ISPs, even if they wanted to. From the ISPs' point of view, whether PT Telkom did or did not have adequate infrastructure, they (ISPs) did not have access to infrastructure that they needed and were forced to improvise with available technology for a workaround solution. If ISPs were allowed to invest in communication infrastructure, it is likely that they would have chosen a different technology. But in this instance, having invested in Wi-Fi, many ISPs continued to use it even after PT Telkom made leased lines available.

Many countries suffer from high leased line and international bandwidth prices. However, we do not see them responding like Indonesia, by deploying Wi-Fi widely. Hence, the earlier allusion that this question has only been partially answered. There are other factors that have contributed to the unique outcome in Indonesia, namely the role played by the civil society and the licensing framework governing the telecom sector. The former was discussed in Chapter 4 and the latter is explored here.

The anomaly between extensive Wi-Fi deployment and a low Internet subscriber base in Indonesia can be explained by the high cost of Internet service and the multi-tier retailing of Internet service by unlicensed ISPs. APJII gets its subscriber data from the registered ISPs who are licensed. Considering that at least a third of the ISPs in Indonesia are not registered and reselling of Internet service is widespread, it would be reasonable to assume that a large number of subscribers and users are not being counted.⁸

Significantly high prices and unavailability of basic communication infrastructure services indicate shortcomings of regulation. The regulatory and market environment are examined below to explain the high communication infrastructure prices and also the behavior of the incumbents and the ISPs.

Indonesia's Telecom Sector

Overview

The performance of the Indonesian telecom sector has been uneven. Although mobile growth rates are impressive, the rest of the sector is plodding along. In 2005, Indonesia had a combined mobile and fixed line penetration of 19.2 per 100 inhabitants (4.4 fixed, 14.8 mobile). Indonesia has lagged behind the other members of the ASEAN (Jakarta Post, 2002). For example, in Malaysia, the penetration rate for fixed and mobile combined was 76.61 percent in 2005 and in the Philippines it was 44 percent during the same period (ITU, 2005). The digital divide is acute not only between Indonesia and its peers but within Indonesia itself. In the eastern provinces, only 0.02 percent of the population has fixed line phones. More than half of Indonesia's 70,000 villages (or about 43,000 villages) do not have access to any public telephones (Smith and Sulaiman, 2004).

Drivers of the Reform Process

The Asian financial crisis of 1997 resulted in a dramatic decline in Indonesia's economy that led to social and political unrest. The financial instability caused by the sharply depreciating Ruppiah, among other factors, compelled the Indonesian government to approach the International Monetary Fund (IMF) for a loan of USD 10.4 billion.⁹

The crisis also had a profound impact on the telecom sector. Foreign and domestic investments dried up with the political turmoil unleashed by the financial crisis and forced the Indonesian government to suspend the ambitious Nusantara 21 Project to connect Indonesia's major islands by submarine and terrestrial cable (Chowdhury and Murniadi, 2004). However, the long-term gains from the restructuring of the sector in response to the external shock are being reaped today. As can be seen in Figure 6.7, the telecom sector as a whole is more dynamic than it ever has been.

The crisis forced the Indonesian government to follow a reform trajectory that it probably would not have followed if left to itself. The IMF Letter of Intent issued in January, 2000,¹⁰ stipulates a host of reforms for the telecom sector, including making the sector fully competitive by privatizing both state-owned telecom companies (PT Telkom and PT Indosat) and restructuring the sector, finalizing and implementing the 1999 Telecommunications Law that explicitly separates policy and regulatory functions, and rationalizing the extensive cross-ownership of PT Telkom and PT Indosat in the sector, among other measures.

More than five years on, the continued dominance of the two government-run operators and the absence of an independent regulator are clear testimony of the Indonesian government's reluctance to

Figure 6.7
Growth of Fixed, Mobile, and Internet Subscribers per 100 Inhabitants in Indonesia (2000–2005)

Source: BRTI, Annual reports of PT Telkom, PT Indosat, PT Excelcom, Bakrie Telkom, APJII.

reform. As discussed in the next sub-section in detail, the Indonesian government has largely made nominal reforms, more true to the letter than the spirit of its agreement with the IMF. Yet, even these half-hearted reforms have contributed to the creation of a vibrant mobile sector.

Current Market Environment

Indonesia's telecom reform process can be broadly divided into two stages, the first spanning the early 1990s with the partial privatization of the state-owned telecom incumbents, and the second stage beginning with the setting up of a regulatory agency and ending the exclusivity rights of the incumbents in fixed telephony after the Asian financial crisis (Sugondo and Bhinekawati, 2004). As can be seen from Figure 6.8, the reform process in Indonesia has been slow and halting with the result that even after 15 years the sector is still dominated by two government-controlled incumbents and suffering from weak regulation. The obvious success story is in the competitive mobile telephony sector, which has shown remarkable growth and has contributed to increased total telephone penetration (14.8 mobile connections per 100 inhabitants versus 4.4 fixed connections per 100) (Sugondo, 2005).

Figure 6.8
Timeline of Indonesia's Halting Reform Process

Source: Author.

From the early 1980s, the telecom sector was dominated by two operators that monopolized all national and international services. PT Indosat was the exclusive provider of international services and operated the international gateways and satellite links. PT Perumtel operated fixed local and long distance services until 1991, when it was partially privatized and reconstituted as PT Telkom. The government created PT Satelindo in 1993 to be the second provider of international service. However, competition was limited since PT Indosat owned 7.5 percent of its shares and PT Telkom 25 percent. Furthermore, PT Satelindo and PT Indosat were required to charge identical tariffs for international service (Minges, 2002). In 1994, PT Satelindo and PT Telkomsel were granted a GSM license. Excelcomindo, a company that the government did not hold shares in, was also given a mobile license in 1996.

The impetus for the second generation of reform came primarily from the IMF. As part of IMF's bailout package, the Indonesian government agreed, among other things, to rapidly privatize both state-owned telecom companies to finalize a new telecom law and set up a transparent regulatory body. The Indonesian government complied with some of the stipulations by passing the Telecommunications Law No. 36 of 1999.

Complying with the commitments to end cross-ownership between PT Telkom and PT Indosat, the Indonesian government separated the two companies in 2001. PT Telkom bought PT Indosat's entire share in PT Telkomsel and PT Indosat bought all of PT Telkom's shares in PT Satelindo. PT Telkomsel's GSM operations were merged with PT Telkom and PT Satelindo's GSM and international operations were merged with PT Indosat.

The Telecommunications Law of 1999 advanced the end of the exclusivity held by PT Telkom for fixed local calls from December 2010 to August 2002, and for long distance from December 2005 to August 2003. PT Indosat's exclusivity over international calls was ended from August 2003 instead of December 2004 (Adiwiyoto, 2004). However, to date, no new licenses have been given to any operators for fixed line services. But the government has doled out USD 49 million (Jakarta Post, 2006) as the first installment of 'compensation' to PT Telkom for ending its monopoly early. The government has not undertaken additional divestment of the telecom incumbents and remains in control of both companies. It owns 51 percent of PT Telkom and the 'golden' and controlling share of PT Indosat.

The current market structure, as shown in Table 6.5, is one that constrains market participation. Historically, exclusive licenses made PT Telkom the monopoly provider of fixed line services. Even though the government has allowed PT Indosat to provide fixed services, it does not have adequate infrastructure on the ground to compete with PT Telkom and provide services such as leased lines.

Furthermore, the absence of an interconnection regime¹¹ mandating cost-oriented interconnection has precluded investment by PT Indosat in the fixed sector. In fact, PT Indosat continues to rely on PT Telkom for leased lines and domestic backbone links.

Regulatory Environment

Although the Telecommunication Law of 1999 enabled the creation of an independent regulatory agency, that option was not exercised until 2003. The ministerial decree of 2003¹² established the Indonesian Telecommunications Regulatory Body, BRTI,¹³ to be effective, starting January 2004. However, BRTI has been seen as a 'transitional' body that would become fully independent only at some undetermined future time (Sugondo, 2005).

Table 6.5
Barriers to Market Participation in Indonesia

BRTI is crippled by design. Its budget is allocated by the ministry Direktorat Jenderal Pos dan Telekomunikasi (DGPT). BRTI only plays an advisory role to the DGPT. Although DGPT is required to consult BRTI on regulatory matters, it is not obliged to follow BRTI's recommendations. BRTI's decisions should be final but, in practice, they are revised by DGPT.

The Regulatory Committee of the BRTI has five members. Since the Chairman of BRTI is also the Director General of the ministry, there is no separation of policy and regulatory functions. Furthermore, BRTI has to report to the ministry every three months or more frequently, if deemed necessary (Adiwiyoto, 2004). The Indonesian Competition Authority, Komisi Pengawas Persaingan Usaha (KPPU) in its assessment of BRTI also concludes that it does not have a strong legal basis, its dependence on the ministry for budgetary support makes it less independent, and the overlap between BRTI and DGPT's functions breeds confusion in decision-making (Adiwiyoto, 2004).

Interviews with members of the regulatory agency and the ministry indicate that no decisions detrimental to PT Telkom can be taken even if such decisions are good for competition. A new entrant that provides backbone services also confirmed that they have to keep leased line prices aligned with PT Telkom due to pressure from the ministry. In order to preserve the financial interests of the incumbents, the Indonesian government is preventing the telecom sector from reaching its full potential and the benefits of affordable access being realized. The current regulatory environment is not conducive for competition or rapid growth of the sector.¹⁴ This is compounded by a licensing framework that inhibits infrastructure rollout.

The telecom licensing structure led to the adoption of Wi-Fi by ISPs as a substitute for backbone. Currently, telecom licensing falls into three categories (BRTI, 2004):

1. Telecommunications Network Providers
   
2. Telecommunications Services Providers
   
3. Telecommunications for special purpose¹⁵

Telecommunications Network Providers are the only ones allowed to build infrastructure. With a Network Provider license, it is possible to provide services for:

(a) Fixed Network: local, long distance, international, and closed user network

(b) Mobile Network: terrestrial, cellular, and satellite

Since ISPs are considered to be Telecom Service Providers, they are not allowed to deploy any infrastructure. Wi-Fi was adopted because it did not involve conspicuous actions such as digging roads and laying cables. And since the investment for a link costs as little as USD 700 (Sunggiardi, 2005), the capital that was put at risk from confiscation was low. Although 2.4 GHz has been unlicensed, it is still illegal for ISPs to deploy any infrastructure, including Wi-Fi, since they are not licensed as Network Service Providers.

The current licensing framework contributes to the inadequate supply of telecommunication infrastructure in Indonesia. The single supplier in fixed line services resulting from the licensing framework was identified by the Indonesian Infocom Society, MASTEL, as the main cause of scarcity of network infrastructure which was constraining Internet development (Setiyadi, 2005). According to Setiyadi, there are not enough Network Operator Centers (NOCs) that interface between the last-mile and the upstream backbone providers in Indonesia. Furthermore, since the ISPs are not allowed to build network infrastructure by licensing conditions, it weakens the ISPs' negotiating power with higher-tier ISPs. MASTEL strongly recommended that the Indonesian regulator should allow ISPs to build their own infrastructure so that they do not have to rely on the monopoly network provider. Clearly, there is a need to strengthen the independent functioning of BRTI and to re-examine the licensing framework, in order to unshackle the telecom sector and Internet growth.

Uneven Backbone Availability

Telecom networks include access networks and backbone, or the 'big pipes' that connect different access networks. Generally, the backbone's capacity is greater than the networks connected to it. Without backbones, local networks would be isolated. Backbones are the basic building blocks of any national or international telecom infrastructure.

In the early years of the Internet in Indonesia, Wi-Fi played a significant role as a low cost, low-bandwidth backhaul for ISPs. On many routes, the incumbent was unable to provide backbone services because it lacked backbone capacity in many of the islands and regions. Outside of Java and Sumatra wired backbone infrastructure was non-existent. Even today, Papua, Moluccas, Kalimantan, and Sulawesi have poor backbone coverage and have to depend on expensive satellite backhaul. Fiber optic-based backbone is sparsely deployed in Indonesia. Much of it has been deployed in the last five years. The backbone in Sumatra consists of a terrestrial microwave network which is linked to Java with a submarine cable. The island of Java has the greatest amount of fiber deployed in the backbone network. Most of the other islands rely on microwave links or satellite.

Inadequate supply of backbone in Indonesia is primarily due to the lack of competition. Although there was demand for backbone infrastructure from ISPs, business users, and other telecom operators, PT Telkom as the legal monopoly did not make the necessary investments. Much of the recent backbone that has been deployed by PT Telkom is a result of pressure from PT Excelcomindo, the competitive mobile provider.

The extensive deployment of Wi-Fi for backhaul is testimony to the inadequate supply of backbone infrastructure. The first time that Wi-Fi was used as a backhaul connection to serve the function of a low-capacity backbone was in 1996 by the ISP, Cabi.net (Simanjuntak, 2005). Until 1998, PT Telkom did not have adequate infrastructure. For example, 2 Mbps tails for the local link were unavailable; the best that PT Telkom could provide was 64 Kbps (Purwadi, 2005). Wi-Fi was attractive to ISPs because Wi-Fi access points could be set up easily in areas that lacked network infrastructure, and it offered higher bandwidth than was available from PT Telkom at a much lower price. The only problem was that at that time, the use of 2.4 GHz bands for Wi-Fi was illegal. Hence, in an environment in which supply of leased lines were constrained, Wi-Fi was used as an alternative infrastructure solution.

However, Wi-Fi is a sub-optimal solution. It is prone to interference and does not provide carrier-class reliability. Furthermore, its capacity is of a different magnitude compared to fiber optic or even microwave links and throughput rapidly degrades with distance. The most important disadvantage of Wi-Fi is its severely limited range (10 to 20 km). Hence, not surprisingly, Indonesian ISPs who were interviewed were unanimous about their preference for genuine backbone and leased line links if they were available at cost-oriented prices (INDOWLI, AWARI and APKOMINDO, 2005).

Currently, the use of Wi-Fi as a backhaul network is on the decline in the larger cities where adequate backbone infrastructure is available. Despite this, some ISPs continue to use Wi-Fi in the 5.8 GHz bands to haul data over distances as long as 14 km. ISPs that continue to use Wi-Fi in large cities do so primarily to avoid paying for leased lines that are priced significantly higher than benchmark prices in other countries, as was shown earlier.

CONCLUSIONS

Wi-Fi 'innovations' in Indonesia are not a result of enlightened policy designed to extend communication infrastructure to unserved areas but rather a workaround solution to hostile market and regulatory conditions. As Samarajiva (2006) concludes in a study on leveraging wireless technologies to achieve rural connectivity, institutions matter. Unless effective policies are in place that allow market entry, manage rights of way, and promote cost-oriented and non-discriminatory access to bottleneck facilities, efforts at bridging the digital divide using wireless technology will fall short of their objectives. The Indonesian experience with Wi-Fi confirms this. Until the market is further liberalized and the regulatory process strengthened, it is unlikely that full potential of the Internet can be realized in Indonesia.

The silver lining for Indonesia is the inherently lower costs of Wi-Fi compared to wired last-mile access technologies, providing the country with potentially explosive Internet growth if regulatory and market conditions are right. A large pool of ICT-savvy teachers and 'geek' activists produced as a result of civil society initiatives, lucidly described in Chapter 4, make it more likely that the benefits of connectivity and infrastructure can be leveraged optimally in Indonesia.

There are a number of lessons from Indonesia that may be applicable to developing countries:

1. Although technology has certain transformative qualities, it cannot by itself bridge the digital divide. The hard work of ensuring that the policy and regulatory pre-conditions must be undertaken in order to realize the benefits of technology.
   
   
2. Indonesia shows that Wi-Fi deployment can be commercially viable and that it can be sustained with private investment.
   
   
3. Competition in the backbone market is necessary to build the foundation of a developing country's communication infrastructure.

Developing countries with entrenched telecom monopolies can hasten the deployment of broadband by delicensing Wi-Fi frequencies. If ISPs can use Wi-Fi in the access network, they can bypass the incumbent's local loop to provide Internet and other communication services—-if they can be assured of reasonable access to leased lines.

This chapter showed the peculiar uses Wi-Fi was put to in the backbone network, and not in the access network, as is the case in other countries. As the regulatory environment improves and leased lines are made available at more reasonable prices, Wi-Fi use in Indonesia is becoming more normal.

NOTES

¹ http://www.firstmilesolutions.com/

² The following are some of the towns in Indonesia with Wi-Fi service: Sumatra-Aceh, Medan, Jambi, Bengkulu, Pekan Baru, Batam, Palembang, Lampung; Java-Jakarta, Bogor, Bandung, Cirbon, Semarang, Yogya, Solo, Magelang, Salatiga, Surabaya, Malang, Kediri, Madiun, Mojokerto; Kalimantan-Pontianak, Banjarmasin, Palankaraya, Samarinda, Balipapan; Sulawesi-Makasser, Manaddo, Palu, Gorontalo, Kandari; Maluku-Ambon; Papua-Jayapura, Timika, Manokwari; Bali-Basar.

³ Data accessed from Internet Service Providers (ISPs) Association of India (ISPAI) website: http://www.ispai.in August 2006.

⁴ In the interviews with ISPs, when the author referred to some of their operations as being 'illegal,' the ISP representatives corrected the usage of the term by coming up with one of their own—'unlegal'—to denote the grey area of the law and the widespread flouting of the rules governing Wi-Fi frequencies.

⁵ The Indonesian regulator, BRTI, announced regulation to reduce leased line prices by as much as 50 percent on September 26, 2006 (http://www.lirneasia.net/2006/10/leased-line/)

⁶ Policy and regulatory action on lowering leased line prices, initiated by LIRNE asia research and advocacy, had led, by April 2007, not only to lower leased line prices but also to significant reductions in ADSL prices.

⁷ Data for India was accessed on BSNL's website: http://www.bsnl.co.in/service/dataone_tariff.htm in February 2006. Data for Indonesia was obtained from PT Telkom's website: http://www.telkomspeedy.com in February 2006.

⁸ Although APJII also provides a separate figure for Internet users for Indonesia that ITU also reports in its indicator database, the author found that APJII routinely multiplies the subscriber base by 10 to obtain it. Hence, the stated user numbers are not accurate.

⁹ Indonesia Letter of Intent with the IMF, available at: http://www.imf.org/external/np/loi/103197.htm

¹⁰ http://www.imf.org/external/NP/LOI/2000/idn/02/index.htm

¹¹ On February 8, 2006, the Ministry issued Government Regulation (GR) No. 8/2006 which mandates a new cost-based interconnection tariff scheme for all telecom network and service operators to take effect from January 2007.

¹² Ministerial Decree No. 31 of 2003.

¹³ Badan Regulasi Telekomunikasi Indonesia.

¹⁴ The mobile sector is an exception because the government has introduced a number of players and effective competition exists.

¹⁵ The third category of license is for government, defence communication and broadcasting.

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