The internet market in Indonesia is now in a rapid growth phase, driven on the demand side by increasing middle class wealth and driven on the supply side by the intense focus of the mobile operators on increasing data subscribers. This is a mobile-first market: of the 125 million internet users forecast in 2015, the vast majority will only ever access the internet via their smartphone, tablet or – even in 2015 – their feature phone.
70 million new internet users by 2015
Growth in Indonesia’s internet sector is accelerating, with consensus forecasts predicting that the number of internet users will grow from 55 million in 2012 to 125 million in 2015. So from a user base that is already larger than Korea’s, the growth rate in Indonesia will exceed 30% per annum for the next five years.
Three key fundamentals underpin the coming sustained period of growth:
- Economic growth is robust and consistent at around 6% per year, and personal spending levels are currently rising by over 10% per year.
- The middle class in Indonesia is growing rapidly, bringing with it strong demand for technology devices and online services.
- Intense competition between the mobile companies is pushing prices down and also raising consumer awareness through mass market advertising campaigns.
Upside scenario of 150 million users by 2015
Even so, we believe most market forecasts are underestimating future growth, and are not taking into account two of the key dynamics of the Indonesian market – that growth suddenly accelerates when key price points are achieved, and that the mobile operators are going to push mobile data like crazy as one of the few ways they can achieve sustained revenue growth.
We therefore believe that there is a high probability of an upside scenario, with the internet user base reaching 149 million users by 2015:
Supporting the argument that Indonesia’s potential is currently being under-called are the higher internet penetration rates in other countries around the region. So while Indonesia currently stands at 24%, the Philippines is already at 33% and Vietnam at 56%. Even if Indonesia reaches the 150 million internet users of the upside forecasts, that would still be below Vietnam’s penetration rate today.
Positive changes in user demographics
Not only is the user base growing rapidly, the profile of the typical internet user is changing too. Within the user base, a big shift in the age of users is currently underway. Traditionally the internet base in Indonesia has been dominated by the under-25s, leading to music, entertainment and social media being the most popular uses.
Starting in 2011 the 25-50 age group begin to play catch-up, and has grown so quickly over the past two years that the user base is now relatively evenly spread across all age groups. This has led to the rapid expansion of more lucrative online services such as e-commerce, travel services and online banking.
It’s not all about the high spenders
We are big believers in the power of market segmentation for tech companies as a means to extract maximum market value from limited early-stage resources. Indonesia has a segment than many overlook, and it happens to include more than 100 million users: internet access via mid-level mobile phones.
2G and 2.5G mobile phones are still a huge chunk of the market in Indonesia (around 75% of all handsets), and many users in Indonesia use a feature phone browser to access the internet, messaging, information and entertainment services.
So the internet sector is about much more than delivering digital services via broadband and 3G to PCs, laptops, smartphones and tablets. It’s also about much more than targeting e-commerce services at credit card holders.
Is there any money to be made? Ask mig33, a social network for feature phones. They have 40 million users in Indonesia with an average monthly revenue of US$3 per month.
So although smartphones have quickly grown to 15% of the mobile market, it is important to recognise that there are still over 150 million feature phones in use. Many of these users are part of the middle class consumer market, and this segment represents both a large market for digital services and a very significant advertising market.
We think mig33 won’t be the only US$100m+ company in the lower levels of Indonesia’s very large pyramid.