Case study: XL Axiata is doing the impossible boosting profits and per-minute revenues in hypercompetitive, multi-SIM Indonesia

31 May 2011 Charles Moon

Overview

Indonesia has been one of the most competitive mobile markets in Asia, with a price war in 2007 spurring massive growth and the emergence of a very strong numberthree player in XL Axiata. Voice promotions in 2010 coupled with a new distribution strategy has allowed XL Axiata to grab further market share, positioning it to assume the number two spot this year. Operational metrics improved with revenue per minute rising by 28% from IDR81 (US$0.01) in 2009 to IDR103 in 2010 despite a 25% decline in average minutes per subscription. More importantly, 2009 vs. 2010 financial KPIs continue to dazzle:

Strategic goals

ROIC: 8.2% vs. 18% Normalized ROE: 20.8% vs. 29.6%.

Indonesias classic emerging-market dynamics prepaid dominance, cost-conscious subscribers, intense competition, a dominant incumbent has resulted in a market where pricing has been the main determinant to new subscriber additions. The consequence of this was seen in 2007, where irrational pricing led to a steep drop in tariffs and ARPUs, but a massive increase in subscription numbers. XL Axiatas subscription and ARPU data show the pattern (see fig. 1).

Fig. 1: Indonesia, XL Axiatas ARPU vs. subscriptions, 4Q06-4Q10

The smoke has cleared, and clear heads now seem to prevail, with the biggest winner being XL. With the market now bloated with multi-SIM users with on-net usage habits, XL has not just boosted its subscriber share, but has increased utilization, returns and profits. Aiming for second place, it has pulled out all the stops around pricing to keep its SIM in the number-two spot in consumers multi-SIM devices, offering free on-net voice, SMS and data all combined with a customer lifecycle management strategy using platforms that allow the delivery of thousands of customized campaign offers and near real-time reward fulfillment.
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Business model With the dominant operator having the most to lose as competition moves to discounted onnet strategies, these types of offers have been the weapon of choice for competitive players. However, in markets where multi-SIM is the norm, on-net tactics could backfire as everyone is effectively on-net, all the time. XL has overcome this problem by offering promotional bundles with free on-net calls and SMS messages, but has mitigated potential cannibalization issues by requiring upfront payments and limiting free use to specific times (see fig. 2).

Fig. 2: XL Axiatas promotional price plans

Market positioning Two key dynamics have resulted in XL deciding to position itself as the second SIM operator a dominant incumbent with a market share of 46% and the prevalence of multi-SIM devices. By some estimates, the actual unique user penetration in Indonesia is around 60%, while the subscription penetration is far higher at 91%. Hence XL has looked to first getting its SIMs into peoples phones, then employing contextual and compelling near real-time offers to boost usage of its network. Results Operational metrics improved with revenue per minute rising by 28% from IDR81 (US$0.01) in 2009 to IDR103 in 2010 (see fig. 3), this despite:

a 25% decline in average minutes per subscription a whopping 28% increase in subscriptions.

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Fig. 3: Indonesia, XL Axiata, MoU vs. voice revenue per minute, 1Q09-4Q10

More importantly, 2009 vs. 2010 financial KPIs continue to dazzle:

ROIC: 8.2% vs. 18%; Normalized ROE: 20.8% vs. 29.6%

Strategic outlook

Fig. 4: XL Axiata SWOT analysis

Informa viewpoint XL Axiata has been very effective in combating the not-so-unique dynamics of the Indonesian mobile market intense competition, widespread multi-SIM usage and very cheap tariffs. By using its superior customer analytics capabilities, the operator has been able to lower the perception of its price levels among its customer base, improve its network traffic profiles (total outgoing minutes actually decreased in 2010), boost its overall voice revenues, and improve its brand perception in the market. With the mobile battle in Indonesia continuing to be primarily about pricing of voice, XL is well-placed to continue improving its position both in terms of subscriptions, revenues and profits. Its key advantage is not only the superior knowledge it enjoys about its user base, but its ability to act on information far more quickly than its competitors.

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As growth will increasingly come from under-utilized, rural areas, this type of price determination platform will work well to not only increase usage among low-tier subscribers, but also lessen the impact of competition, allowing XL to successfully pursue its goal of being the second SIM in everyones device.

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2011 Informa Telecoms & Media