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Summary: The internet in Indonesia must jump several hurdles before the nation can join the new electronic economy. These impediments include weak infrastructure, low user confidence, and inchoate public policy. However, several changes during the last year bode well for the future of the sector. The tiny number of internet users in Indonesia grew by 180 percent in 2000 and is predicted to triple in 2001. Telecom deregulation in 2002 should encourage infrastructure development and further extend internet access. Several domestic portals and internet service providers have recently emerged as success stories. However, progress in the sector could cease if the GOI chooses to over-regulate the internet and adopt counter productive policies. End summary.

A LONG JOURNEY AHEAD

Indonesia is slowly joining the information superhighway. The nation must not only bring the internet to its vast rural population, but also bridge hundreds of islands. Vital educational, medical, and agricultural information could be disseminated from the urban core to remote destinations via internet terminals in centralized locations. However, before the internet can have a meaningful impact, Indonesia must first overcome a weak infrastructure, inexperienced users, and the potential for over-regulation.

WEAK LANDLINE INFRASTRUCTURE A TEMPORARY ISSUE?

The development of traditional telecommunications infrastructure in Indonesia is stagnant due to a lack of investment and contractual disputes among current investors. Indonesia suffers from one of the lowest teledensities in the world. Only 2 percent of Indonesians have telephone service. Of those, only one-quarter have access to the internet (roughly .6 percent of the total population). While, the existing landlines were designed to handle a three to four minute call, the average internet session lasts thirty minutes. The current system cannot support broad use of the internet.

State-owned PT Telkom and its five joint operations scheme foreign partners (KSOs) hold the exclusive rights to provide domestic telephone service until 2002. By 1999, the KSOs had fulfilled their contractual obligations under agreements with Telkom to invest USD 1.3 million each into new line investment. In exchange for developing the telecommunications infrastructure, the KSOs were awarded the sole legal right to build out until 2010. A 2000 Ministerial Decree implementing the 1999 Telecommunications Law shortened the period of exclusivity from 2010 to 2002. With the reduced period of exclusivity and an unrealistic tariff structure, the KSOs have no incentive to continue construction. The decree also provided for the entry of a second service provider in 2002. The introduction of a competitor should encourage teledensity expansion if the government chooses to raise tariffs in conformity with the 1999 Telecommunications Law.

GROWING NUMBER OF INDONESIANS USING THE INTERNET

Currently only .6 percent of all Indonesians are logged-on, compared to 41.9 percent of the citizens in Singapore and 6.9 percent in Malaysia. In 2000, according to the Indonesian Association of Internet Service Providers, the number of internet users in Indonesia grew by 180 percent. By comparison, usage in Singapore and Malaysia increased by 115 and 90 percent, respectively. The number of internet users in Indonesia is expected to more than triple in 2001 from approximately 1.2 million users to 4 million.

The growing popularity of the internet and the recovering economy have prompted increased computer sales. Since the onset of the economic crisis in 1997, businesses and schools accounted for nearly all sales of new computers. Few Indonesians have computers in their homes, but end-of-year PC sales for 2000 appeared to exceed pre-crisis levels, reflecting an increased demand from individuals. The recent introduction of a 20 percent luxury tax on computers may, however, diminish future sales.

INTERNET CAFES HELPING SPUR INTERNET EXPANSION

Warnets, Indonesia’s version of the internet cafe, are a popular means of accessing the internet for those who cannot afford a computer or high telephone bills. Ranging in size from a single stall in a remote village to an entire corner of a busy Jakarta McDonald’s, over 2,000 warnets offer a popular means of logging-on in Indonesia. A recent AC Nielson poll found that 52 percent of all users access the internet via warnets, followed by 32 percent at the work place, 28 percent at school, 9 percent at a friend’s house, and only 6 percent from home. (Respondents could pick more than one answer). Warnets do not require a license. Due to the great success of the warnets, many telephone kiosks or wartels (cafes with public phone service) are adding internet components to their operations.

START-UPS GROWING, BUT HAVE NOT YET TAKEN OFF

The internet sector, due to the growing market and limited regulatory barriers, attracts many young entrepreneurs. Stories abound of college students in Jakarta, Bandung, Surabaya, Yogyakarta, and Bali selling their cars to start up warnets, portals, and internet service providers (ISP). Since the spring of 1999, an average of ten new Indonesian language portals have been launched each month. Portal companies are not required to obtain a license. Currently, 107 ISPs are licensed, although many of them are owned by the same person. The 40 active ISPs service over 650,000 clients.

None of Indonesia's internet start-ups have emerged as dominant players. No internet portals and only two ISPs are publicly listed. Internet success stories tend to be companies with roots deep in the realm of traditional business. Many advertisements on Indonesian web pages, a traditional internet cash cow, provide links to foreign web pages, not indigenous vendors. Currently, consumers tend to use the internet for research or correspondence, not commerce.

Success stories do exist. Jakarta news and entertainment web site Astaga!com was recently acquired by M-Web, an international infocom company. Astaga boasts 600,000 registered users and averages 21 million hits per month. (In comparison, Yahoo.com receives 18.6 billion hits per month.) Boleh Net, a popular e-mail site, recently became the first Indonesian company to rank in the top 1,000 websites in the world, according to an international internet ratings firm. The one-year-old organization reports 30 million hits per month and recently expanded its services to include employment, classified, and cyberwriting sites.

CONSUMER CONFIDENCE LOW

The e-commerce sector in Indonesia is taking off only slowly, despite the rapid growth of portals and ISPs. One of the greatest hurdles to e-commerce is the limited number of Indonesians with credit cards. For those who have cards, many banks require the user to ask permission via a telephone call prior to each internet purchase because of rampant credit card fraud. In addition, most on-line stores will ship only to Jakarta. To overcome these problems, several e-vendors offer the COD method. In a survey of 1,000 internet users, only 9.9 percent were reported to be willing to make purchases on line.

The Indonesian internet consumer is more of a browser than a buyer. The internet is used as a tool to compare prices or gather information on products in the market, after which the purchase is made using traditional methods. In the furniture and handicraft sectors, clearinghouse sites have provided many small producers with international marketing opportunities much more effective than catalog mailings or random trade shows. For example, international internet company Global Sources links small producers like Batavia Furniture in Jakarta with global buyers such as K-mart and the Gap.

LEGISLATION NEEDED TO PROTECT E-COMMERCE . . .

Indonesia currently has no laws governing e-commerce. The Ministry of Communications, the Ministry of Finance, and the Ministry of Justice have all commissioned studies to evaluate Indonesia's legislative needs. The groups had hoped to have drafts completed by the end of 2000 and ready for ratification in early 2001. To date, no ministry has put forward a formal proposal.

. . . BUT OVER-REGULATION COULD KILL THE SECTOR

Ill-conceived public policy is currently the greatest threat to internet growth in Indonesia. On at least one occasion, the government has come close to doing serious harm. In August 2000, the GOI released an updated Negative Investment List that initially banned all foreign investment in the internet sector. Portals and ISPs rely on foreign investment, and, after a massive outcry from the industry, the GOI revoked the ban. Counter productive legislation such as the Negative Investment List and the disputes between Telkom and its KSO partners could encourage foreign investors to locate their companies elsewhere. Lycos, for example, announced it would offer an Indonesian language search engine -- based in Singapore rather than Jakarta.

LONG ROAD AHEAD, BUT NOT IMPOSSIBLE

More and more urban Indonesians are using the internet to e-mail family and friends, advertise products, and conduct business. The cellular industry could provide the means for Indonesia to leapfrog traditional telephony. New 3G (third generation) technology will marry cellular to internet and could provide access to both throughout the country. The GOI plans to issue 3G licenses by 2003. It hopes that international investors will willingly share the high-cost burden of 3G wireless in exchange for access to one of the largest underdeveloped telecommunications markets in the world. Programs sponsored by the GOI, NGOs, and trade groups are exposing larger segments of the population, beyond students and businessmen, to the internet. By the time that the next generation infrastructure is in place, Indonesia should be ready to leave the slow lane and merge with global traffic on the information superhighway.

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