Analysis

Indonesia Now!
A Broader Look at Indonesian Startups and Internet Business Prospects

Executive Summary

Indonesia, with population of 243 million people, is the 4^th most populated country in the world. Indonesia’s 2009 GDP of $969.2 billion (purchasing power parity) is ranked 16^th in the world. Its projected real growths in GDP and income per capita for the period of 2007-2050 are 6.7% and 3.9% annually, the 3^rd highest after India and China. By 2050, Indonesia is projected to become the 6^th largest economy in the world after China, US, India, Brazil, and Japan.

The number of Internet users in Indonesia is also growing at a lightning speed. From 2000 to 2009, Internet users have grown from 2 million to 30 million users, a 1,400% increase in the last 9 years. Even though Indonesia is now ranked 11^th in the world for the number of Internet users, only about 12.3% of its population has access to the Internet. The number of Internet users, especially those who access the Internet using their mobile phone, is projected to grow at an even faster rate in the future. The cost to access the Internet has dropped significantly for Indonesians in the last 2 years. Most Indonesians can now have access to the Internet using their mobile phone for only $7.7 per month. By 2014, the number of Internet users in Indonesia is projected to reach 150 million.

Despite all these strong economic and Internet user projections, Internet business in Indonesia is still in its infancy. As of March 2010, only 68% of Indonesia’s online population had shopped on the Internet at least once. E-commerce is estimated worth just $21.8 million a year. The number of local websites and contents are still very limited compared to the number of Internet users. As of June 2010, only two local websites were included in the top 10 sites visited in Indonesia.

With opportunities come also challenges. Out of 69 countries, Indonesia ranked 67^th only in the latest E-readiness ranking, a ranking that ranks countries for doing e-business. Internet users are still concentrated in Jakarta, the capital city, and other big cities. E-business regulations are still being developed. Unsophisticated payment systems and low broadband penetration are retarding e-commerce development in Indonesia. And, the biggest challenge of all, lack of trust among Indonesians in doing online transactions.

Undoubtedly, Indonesia presents many opportunities and challenges in the Internet business. The general message is that entrepreneurs and investors with long time horizons should look at Internet business in Indonesia as an alternative worth considering depending on the nature of the investment and the risk tolerance of the entrepreneur or investor.

Economic Data

For the last couple years, Indonesia has been enjoying a stable, high real GDP growth.  During the world crisis in 2009, when most of the countries in the region had a negative or almost zero real GDP growth (Singapore -2.10%, Malaysia – 2.20%, Thailand -2.80%, Philippine 0.90%, South Korea 0.20%, Japan -5.30%, and the United States -2.40%), Indonesia managed to protect itself from the global economic recession and achieved a positive growth of 4.5%. Indonesia’s real GDP is estimated to continue growing by 5.9%, 6.2%, and 6.3% in 2010, 2011, and 2012 respectively (Source: World Bank).

The actual growth during the first semester of 2010 was 5.8% and the growth for the second semester is estimated to reach 6.9%, resulting in a 6.0% growth for the whole year (Source: Indonesia Minister of Finance). Private consumption, which accounts for around 68% of Indonesia’s GDP, grew 3.9% in the first three months of 2010. Economic growth has also been supported by rising confidence, buoyed by the most stable political climate since the economic crisis in 1998. A central bank index measuring consumer sentiment rose to 107.4 in March 2010 from 98.6 a year earlier.

Exports grew 19.6% in the 1^st quarter compared with a contraction of 18.7% a year earlier. The Jakarta benchmark stock index increased 87% in 2009 and the rupiah gained 14% in the past 12 months, the best performance from an Asian currency. Foreign holdings of Indonesian bonds rose to $16.4 billion as of the end of April from $12 billion at the end of December 2009. Domestic and foreign investment totaled $4.6 billion in the first quarter, according to data from the Board of Capital Investment. Foreign direct investment accounted for $3.9 billion (Source: Bloomberg).

In its research publication titled “The World in 2050, Beyond the BRICs: a broader look at emerging market growth prospects”, PricewaterhouseCoopers (PwC) included Indonesia as one of the “E7” emerging economies, the “BRIC” economies of Brazil, Russia, India, and China, plus Mexico, Indonesia, and Turkey. PwC also estimated that, by 2050, Indonesia economy will become the 6^th largest in the world, larger than the Germany, UK, France, Italy, Canada, and Spain economies.

Internet Users

With 30 million Internet users as of the end of 2009, Indonesia is the 5th largest Internet market in Asia (after China, Japan, India, and South Korea). The number of Internet users in Indonesia is growing really fast (the highest growth among Asia countries after China), especially the number of users who use their mobile phone to access the Internet. In five years, about more than half of the Indonesian population or 150 million people are projected to have access to the Internet (most of them through their mobile phone). Compared to the population (not Internet users) of Singapore (4.8 million), Malaysia (27 million), South Korea (48.6 million), Thailand (67 million), Vietnam (86 million), and Philippine (90 million), it is clear that the number of Internet users in Indonesia will be significantly higher than the number of Internet users in those countries.

Similar to other emerging online markets, Internet in Indonesia has younger audiences. According to comScore, about 73% of Internet population in Indonesia is between 15 – 34 years old.  In addition, only 36% of Internet users in Indonesia is a woman.

In November 2009, President Susilo Bambang Yudhoyono officially declared the beginning of the construction of optic fiber project for the Palapa Ring Network in the southern part of Eastern Indonesia that will link Kupang and Mataram. Palapa Ring Network is a national optic fiber network (at 320 Gbps) that will reach 33 provincial capitals and 440 cities or regencies throughout Indonesia. As many as 31,824 villages in Indonesia will have access and afford telecommunications system by the end of 2010. In addition, in order to extend telecommunications and broadband Internet services to remote areas, the government will hold a tender for the provision of national WiMax services in 2010. These two projects will boost the number of Internet users in Indonesia even further.

Access to Internet

Wired Internet

Broadband wired Internet connection is still pricey for most Indonesians. The cheapest unlimited Internet access service available from PT Telkom is about $72 per month with a connection speed only up to 1Mbps. PT First Media offers unlimited Internet access service with connection speed varies from 1.5Mbps ($37 per month) to 10 Mbps ($226 per month), however, these services are only available for users in Jakarta area. Due to its expensive price, there is still a limited number of broadband wired Internet subscribers in Indonesia. As of June 2010, PT Telkom, the largest broadband wired Internet service provider, has only about 2 million subscribers in 378 cities in Indonesia. Meanwhile, PT First Media has a target to reach 260 thousand subscribers by 2010.

Without a big decrease in price, the number of wired broadband Internet subscribers is not projected to have a significant growth in the near future.

Wireless/Mobile Internet

In Indonesia, mobile is big. As of 2009, there were about 159 million mobile cellular subscriptions in Indonesia, 15 million of them are mobile cellular subscriptions with broadband access (Source: ITU). In less than five years, about half of Indonesia population (120 million) will use Internet from mobile access. Young Indonesians, aged 8 – 24 years old, have the highest level of mobile phone ownership in the region, at 80% penetration (Source: Monetizing Indonesia Internet & Mobile). Indonesia also ranks among the highest in the world for mobile browsing intensity: 633 pages per month/person (Source: Opera).

There are three primary reasons why mobile is really big in Indonesia: price, infrastructure, and culture. Wireless/mobile Internet service is much cheaper compared to wired broadband. Subscribers can get a Blackberry Internet service for as low as $7.7 per month. Unlike wired Internet infrastructure, mobile infrastructure is much more developed in Indonesia. The infrastructure covers 90% of Indonesia’s population and offers fast connection through 3G networks. Starting June 2010, a WiMax or 4G connection is also available for subscribers in Jakarta area. Many young Indonesians spend most of their free time hanging out with their friends outside their home. In addition, bad traffic condition is a daily menu for most Indonesian workers, forcing them to spend a significant amount of their time on the road. Mobile Internet access is becoming a must to have, not a nice to have anymore.

“Warung” Internet

The remaining Indonesians access the Internet in Warung Internet or Internet Kiosk. Those who can’t afford to pay for monthly subscription fee will go to Warung Internet and pay an hourly fee. According to a study conducted by Yahoo and Taylor Nelson Sofres (TNS ) Indonesia, about 53% of Indonesians access the Internet in Warung Internet.

Internet Use

Internet users in Indonesia spend about 17.2 hours online per month (comScore Media Metrix). According to a survey conducted by Nielsen Indonesia, most Indonesians use the Internet for checking email (42%), reading newspaper (39%), searching for information about products or services (29%), reading magazines (27%), and chatting (23%). A study by comScore shows only 50% of Indonesian Internet users do online shopping and they spend only 1% on their online time for shopping. Clearly, online shopping is still not the main reason for Indonesians to go online.

While Indonesians are still cautious in using the Internet for shopping, there are very enthusiastic to online social networking. 28 million Indonesians have account(s) with Facebook, making them the 3^rd largest Facebook users in the world. As of June 2010, Indonesians also produced the 3^rd highest number of tweets in the world. It is not surprising at all that 87% of Indonesians does social networking and they spend 32.6% of their online time or 5.8 hours per month in websites such as Facebook and Twitter (comScore).

In addition to social networking, Indonesians spend significant hours in front of their computer/mobile phone watching online videos (second only after China). A recent study by Nielsen’s Online practice found that online video is most broadly watched among online consumers in China and Indonesia, where consumers are 26% more likely to use video. The number of Indonesians who watch online videos on computer at work and on their mobile phone ranked number 13 and 2 in the world.

With the high popularity of social networking sites in Indonesia, online gaming is also getting a good traction among Indonesian Internet users. 44.6% of them play online games and they spend 2.9% on their online time on these sites (comScore).

Indonesians also enjoy sharing their photos with their friends. Many online Indonesians (63.9%) upload and share their photos in sites such as flickr and they, on average, 3.5% of their online time in photo sharing sites (comScore).

According to comScore, about 63.1% of Indonesian Internet users uses the Internet to find news or information and they spend, on average, 4.7% of their online time for news and information. However, this data may not be highly accurate considering that the list of the most visited websites in Indonesia is dominated by news and information websites such as Detik.com and Kompas.com.

Online banking has not gained popularity among Indonesian online community. comScore’s study shows that business and finance sites only reach 24.8% of Internet users in Indonesia. Furthermore, Indonesians spend only 1.1% of their online time in business and finance sites. Most Indonesians prefer not to use online banking for their financial transactions due to security concern. In addition, currently only a few major banks in Indonesia (e.g., Bank Central Asia and Bank Mandiri) provide online banking services to their customers.

Most Internet users (84.2%) in Indonesia use Search to find information they are looking for. The average number of Searches per user is 91.4 (comScore). 80% of Indonesian Internet users uses Google to do their Search (comScore).

E-commerce

Recently, Indonesians are more eager to spend their money online. Another survey conducted in March 2010 by Nielsen Indonesia found that 68% of Indonesia’s online population had shopped on the Internet at least once, an increase from 63% in the 4^th quarter of last year and up from a mere 3% in 2008. The increase is mainly caused by the improvement in the level of comfort when buying online and an increasing sense of security. About 24% of the country’s online population now spends more than 10% of their monthly shopping budget online, compared with an Asia-Pacific average of 35% who say they spend more than 10% of their monthly budget online. That compares to 13% in Malaysia, 17% in Thailand and the Philippines and 32% in Vietnam. According to the Global Trends in Online Shopping, a Nielsen Global Consumer Report issued in June 2010, only 1% of Indonesian online consumers will spend between 51% – 75% of their total monthly spending online, 5% between 26% – 50%, and 18% between 11% – 25%.

Books are the most popular online purchase among Indonesians, with 38% saying they would buy a book online at some time during the next six months. An additional 33% said they intended to buy clothing, while 29% said airline tickets and 27% electronics. Most of the online shoppers spent their money buying books at Amazon.com because the website provides security and trust and it’s easier to find books in English [at Amazon.com] rather than the translated version.

Lack of a sophisticated payment system is one of the main factors that holdback e-commerce in Indonesia. Popular sites such as Kaskus.us, where users can buy and sell mainly secondhand goods, rely mainly on bank transfers. More sophisticated payment systems, such as PayPal, are still unavailable on most Indonesian sites.

Even though unsophisticated payment systems and low broadband penetration are retarding e-commerce development in Indonesia, both domestic and international companies are positioning themselves for a hoped-for boom in the largely untapped market. In May 2010, a Japanese Internet company, Rakuten, and PT Global Mediacom announced they have reached an agreement to establish a joint venture whereby the two companies will jointly operate an Internet shopping mall for Indonesian’s consumers that will be launched in the second half of 2010. The joint venture will initially operate the Internet shopping mall by offering domestically produced products to Indonesian consumers by local merchants.

Meanwhile, PT Telkom has invested $2 million to develop Plasa.com, an e-commerce portal that aims to attract local merchants to sell their products online. Andi S. Boediman, the Chief Innovation Officer at Metranet, an online shopping subsidiary of PT Telkom that launched Plasa.com, estimated e-commerce was worth just $21.8 million a year in Indonesia. However, given that Indonesia is projected to have 150 million Internet users by 2014, Andi is optimistic about Indonesia e-commerce’s potential. He estimates annual e-commerce transactions will reach $111 million by 2013.

Despite PT Telkom and PT Global Mediacom’s grand plans, many existing e-commerce sites are struggling. Hendrik Tio, Chief Executive of Bhineka.com, a local online shop for electronics such as computers and accessories, said Indonesians still had a conventional mind-set when it came to shopping and had more trust in purchasing items directly in a store. Bhineka launched as an online-only retailer three years ago but has yet to turn a profit. It subsequently set up bricks and mortar stores and now views its online store mainly as a way to promote items in its shops.

Digital Advertising

A survey conducted by Nielsen Media Indonesia found that Indonesian companies and organizations spent $5.4 billion in advertising in 2009, a 16% increase from the prior year spending. More than $3.3 billion were spent on TV advertising, $1.8 billion in newspapers ads, and $111 million on tabloid and magazine advertising. Only 0%-1% of those spending was allocated to digital media. In 2010, advertising spending is projected to reach $6.5 billion, according to Nielsen Media Indonesia. While the current digital advertising spending is still very limited, the number of mobile ad requests served in Indonesia is among the highest. According to AdMob, there were 1.1 billion mobile ad requests served in May 2010, the 3^rd highest in the world.

Conclusion

Considering its high economic and Internet user growths, Indonesia has a great potential for Internet business. Moreover, the Internet business there is still in a very early stage with a limited number of local players and products/services offered. However, it would not be easy to win in this industry. Unsophisticated payment infrastructure and conventional mind-set of its people will become the biggest challenges for entrepreneurs and investors who want to explore Indonesia’s untapped potential in Internet business. The general message is that entrepreneurs and investors with long time horizons should look at Internet business in Indonesia as an alternative worth considering depending on the nature of the investment and the risk tolerance of the entrepreneur or investor.

Author’s Note: This analysis is far from complete and perfect. This is a life article that will be updated periodically as additional information and data become available. Any feedback and/or contribution will be highly appreciated.

Sources

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PT First Media: http://www.fastnetmegaspeed.com/

ITU: http://www.itu.int/ITU-D/icteye/Default.aspx

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Nielsen: How We Watch — The Global State of Video Consumption

Nielsen: Global Trends in Online Shopping

comScore: State of the Internet with focus on Asia Pacific