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Case study: XL Axiata is doing theimpossible – boosting profits andper-minute revenues in hyper-competitive, multi-SIM Indonesia31 May 2011Charles Moon

Overview

• Indonesia has been one of the most competitive mobile markets in Asia, with a pricewar in 2007 spurring massive growth and the emergence of a very strong number-three player in XL Axiata.

• Voice promotions in 2010 coupled with a new distribution strategy has allowed XLAxiata to grab further market share, positioning it to assume the number two spot thisyear.

• 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 persubscription.

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

– ROIC: 8.2% vs. 18%

– Normalized ROE: 20.8% vs. 29.6%.

Strategic goals

Indonesia’s classic emerging-market dynamics – prepaid dominance, cost-conscioussubscribers, intense competition, a dominant incumbent – has resulted in a market wherepricing has been the main determinant to new subscriber additions. The consequence of thiswas seen in 2007, where irrational pricing led to a steep drop in tariffs and ARPUs, but amassive increase in subscription numbers. XL Axiata’s subscription and ARPU data show thepattern (see fig. 1).

Fig. 1: Indonesia, XL Axiata’s ARPU vs. subscriptions, 4Q06-4Q10

The smoke has cleared, and clear heads now seem to prevail, with the biggest winner beingXL. With the market now bloated with multi-SIM users with on-net usage habits, XL has notjust 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 thenumber-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 thedelivery 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 on-net 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 everyoneis effectively on-net, all the time.

XL has overcome this problem by offering promotional bundles with free on-net calls and SMSmessages, but has mitigated potential cannibalization issues by requiring upfront paymentsand limiting free use to specific times (see fig. 2).

Fig. 2: XL Axiata’s 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 thesubscription penetration is far higher at 91%. Hence XL has looked to first getting its SIMsinto people’s phones, then employing contextual and compelling near real-time offers to boostusage 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 Indonesianmobile 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 theperception 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, andimprove its brand perception in the market.

With the mobile battle in Indonesia continuing to be primarily about pricing of voice, XL iswell-placed to continue improving its position – both in terms of subscriptions, revenues andprofits. Its key advantage is not only the superior knowledge it enjoys about its user base, butits 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 pricedetermination 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 beingthe “second SIM” in everyone’s device.