ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ET
New Standards and Interpretations
We have applied IFRS 16 (Leases) ("IFRS 16") since January 1, 2019. Previous financial years have not been restated following these changes in accounting policies. See Note 2.aa to the Consolidated Financial Statements included in this Form 20-F. As a result, our Consolidated Financial Statements as of and for the year ended December 31, 2018 are not directly and fully comparable to our consolidated financial statements as of and for the years ended December 31, 2019 and 2020.
IFRS 16 sets out a comprehensive model for identification of lease agreements and their treatment in the financial statements of both lessees and lessors. IFRS 16 introduces a control model for the identification of leases, distinguishing between leases and service contracts on the basis of whether there is an identified asset controlled by the customer.
IFRS 16 supersedes a number of existing standards and interpretations, including IAS 17 (Leases), IFRIC 4 (Determining whether an Arrangement contains a Lease), SIC 15 (Operating Leases - Incentives), and SIC 27 (Evaluating the Substance of Transactions Involving the Legal Form of a Lease). We elected to apply IFRS 16 by using the modified retrospective approach. Therefore, we recognize the cumulative effect of adopting IFRS 16 as an adjustment to the opening balance of retained earnings at January 1, 2019, with no restatement of comparative information.
Under IAS 17 (Leases), lessees recognized a periodic lease expense over the lease term for operating leases. The adoption of IFRS 16 resulted in our consolidated future minimum lease payments under non-cancelable operating leases to be recognized as lease liabilities with corresponding right-of-use assets. These amounts are adjusted for the effects of discounting and of the practical expedients available under the transition guidance for IFRS 16 that we selected.
We elected the package of practical expedients permitted under the transition guidance for IFRS 16, which among other things, allows us to carryforward the historical lease assessments. This allowed us not to reassess our prior conclusions on lease identification, lease classification, and initial direct costs.
Please see Note 2.l to our Consolidated Financial Statements for a detailed discussion of IFRS 16. For other new standards, amendments to standards and interpretations not yet adopted in 2020 which have not been applied in preparing the Consolidated Financial Statements, see Note 39 to our Consolidated Financial Statements. For amendments to standards and interpretations adopted in 2020 which have not been applied in preparing the Consolidated Financial Statements, see Note 2.a. Such amendments had no material impact on our Consolidated Financial Statements.
Regarding infrastructure development, research and integration of the Defined Networking (SDN) transport software technology as a platform for smarter network automation is key to the development of our network strategy and design. This technology allows the development of network slicing to support the implementation of 5G transport. 5G transport requires not only greater network capacity, but also the differentiation of the quality of services according to the requirements set out for such telecommunications services. Network slicing is a technology that virtualizes multiple logical networks (called slices) on our infrastructure where resources or virtualized functions can be flexibly configured by demands of applications to satisfy their quality of service requirements. In addition, to support the implementation of retail, enterprise customer and wholesale services, as well as the development of IoT, we carry out research on IPv6-based service infrastructure, such as 64 translation technology, VPN64 service and reverse proxy. IPv6 is expected to be the next popular technology of the Internet Protocol, the communications protocol that provides an end-to-end networks reachability across the internet. It allows for much higher theoretical limits on the number of IP addresses than the current IPv4 system.
We also continue our research on infrastructure technology for telephone service nodes, high-speed internet service nodes and smart transport technology based on packet and optical technologies. The service nodes we research on are such as the IP Multimedia Subsystem (IMS) and Session Border Controller (SBC) for telephony services, Broadband Remote Access Server (BRAS) and Policy Charging Control (PCC) for the control of high-speed internet service nodes.
Those service node technologies have been evolving with the use of virtual technology that enhances speed, flexibility of deployment and operating efficiency. Our research, among other things, aims to identify and develop network technology that can improve customer experience in accessing and using media and telecommunications services. Therefore, we conducted research on triple play services, especially video services. We are constantly trying to identify the best technology for the use and development of IPTV and OTT video platforms, video conferencing platforms, infrastructure virtualization (virtual content delivery network & virtual set-top box) to provide the best quality of services.
We believe that our assessment and testing of future technologies and the IoT will contribute to our long-term success, particularly in terms of updating our knowledge developing our human capital. This may create opportunities for additional revenues and cost savings in the future. The Low Power Wide Area Network (LPWAN), Narrow Band - IoT (NB-IoT) and 5G technology are among the technologies that we have begun to explore in relation to the IoT. The aim of our research is to pave the way towards a future in which smart factories, intelligent machines and networked processes are brought together to implement "Industry 4.0" initiatives. Our research has shown that the provision of space telecommunications infrastructure is increasingly important and therefore, we are studying non-geostationary orbit (NGSO) satellite technology, high altitude platform stations (HAPs), drones and balloons.
As the main connectivity provider in the region, we are also concerned about cyber security and Distributed Denial of Service (DDoS) attacks that have been massively targeting ISPs and business customers in recent years. To mitigate the risk and to protect our valuable business customers from DDoS attacks, we have conducted research on and guided the implementation of carrier grade anti-DDoS solutions that can detect DDoS attacks and divert the traffics to a scrubbing system that will scrub the DDoS traffic and re-route clean traffic to our customers. As one of the main broadband internet service providers in Indonesia based on the number of subscribers and coverage, especially through our retail high-speed internet provider, IndiHome, we have conducted research on endpoint security, including Internet Protocol version 6 (IPv6). We are also researching security mechanisms that can be deployed within our digital factory, so that security will be inherent in our DevSecOps (Development-Security-Operation) methodology in providing our digital applications for enriching our customer's digital lifestyle in a secured manner as smartphone use increases. We have also developed our internal Data Breach Management Recommendations which offer guidance for mitigating the financial and reputational impact of data breaches and cyber incidents. A "data breach" refers to an incident resulting in exposure to potential unauthorized access of personal data within the possession of an organization or under its control. Data breaches often lead to financial losses and a loss of consumer trust. Hence, we must prevent and manage the risk of data breaches.
The recommendations we have developed contain steps that should be considered and the parties that should be responsible for preventing and responding to data breaches involving our digital services.
Our research and development activities include our open innovation program where we aim to leverage the creativity of Indonesian digital technology entrepreneurs with the aim of integrating the products and services that they develop into our business. In practice, our products and services are designed and developed according to the needs of consumers in the current digital era. In connection with our efforts to develop such products and services, in 2019, we continued our Digital Amoeba and Indigo Creative Nation programs. Digital Amoeba aims to capture and accelerate innovation internally at Telkom and its subsidiaries. Indigo Creative Nation is Telkom's open innovation program in collaboration with digital startups to develop Indonesia's digital creative industry while developing Telkom's digital business portfolio. Our subsidiary, PT Metra Digital Investama, also known as MDI Ventures, manages and invests venture funds in potential digital startups. We also provide office facilities for nurturing creativity such as shared meeting rooms, classrooms and common areas for entrepreneurs which are known as Digital Innovation Lounges ("DILo") at 17 locations in Indonesia.
We conduct incubation and acceleration activities and provide mentorships to assist startups to develop and validate their customer, product, business model, and market validation. We occasionally provide seed financing in the form of equity to startups which we believe are commercially viable. We also support startups to commercialize their products and services and obtain follow-on funding. As at December 31, 2020, 51 teams were actively validating new products and new processes, with 23 projects prioritized for accelerated development to potentially integrate into our business portfolio. Since 2013, Indigo Creative Nation has incubated 183 startups. As of December 31, 2020, 110 startups had started commercial operations and an additional 23 startups had received funding from domestic and foreign investors.
A number of startups have synergized with us in providing digital products and solutions such as Tees.id, Privy.ID, Run System, Opsigo, Goers, Doclink, Tyranix, Fishgator, Habibi Garden, Muslimlife, Bahaso and Verihubs. Examples of the synergies include the development of the Indonesia Tourism Exchange (ITX) using Opsigo, the development of Chat Aja applications using the Qiscus messaging platform, and the development of Jasa Marga's video analytics using Nodeflux products. In 2020, we have also contributed to the development of (i) an agriculture business ecosystem (including fishery) by Tribe Agree in participation with startups Habibi Garden and Fishgator to build technological modules for the monitoring and analysis of agricultural growth factors such as watering, fertilization, feeding and climate, (ii) contents for the Digital Pesantren together with startup Muslimlife, (iii) complementary contents for Pijar Mahir with startup Bahaso, (iv) the digitalization of SMEs with startup Tyranix, and (v) e-Health services with startup Doclink. Below are a few examples of synergies achieved with startups in which we invested in:
• Privy.ID: Privy.ID provides digital signature services and fintech services. We have used Privy.ID products to accelerate our internal business processes and propose solutions to certain of our customers to accelerate their own business processes. The need for digital signature services has significantly increased during the COVID-19 pandemic and is expected to become the new norm for executing documents.
• DocLink: DocLink provides home care services for people who have limited mobility. DocLink's service offering complements the telemedicine healthcare ecosystem that is being developed by Admedika, one of our subsidiaries that provides healthcare services.
• Runsystem: Runsystem provides Enterprise Resource Planning platform to handle end-to-end business processes specifically suitable for medium and large companies.
Our subsidiary PT Metra Digital Investama ("MDI Ventures") handles various corporate venture capital initiatives. It identifies investment opportunities, raises funds, aims to create synergies, in particular with Telkom Group companies and businesses, and maximize value creation, manages a significant investment portfolio and provides operational assistance and advice to startups after investing in them. Based in Jakarta, MDI Ventures has operations in Singapore and the Silicon Valley. The focus of these investments is on high growth business verticals that are or will be able to deliver enhanced digital experience and best services to customers, such as financial technology, cloud computing, Big Data, health technology, E-commerce, or the Internet of Things, among others. In 2020, MDI invested in 15 new startups in Indonesia, India, Singapore, and the United States. Since 2016, MDI Ventures has invested in more than 50 startups in 12 countries. A number of these companies were the targets of mergers and acquisitions or even completed initial public offerings. MDI Ventures has collaborated with many Indonesian SOEs to build a digital ecosystem and accelerate the pace of digitalization of the Indonesian economy. MDI Ventures also collaborates with global investors to invest in global startups, and with global startup incubators and accelerators to support Telkom's Indigo Creative Nation program. As at the date hereof, MDI Ventures' fund management activities include managing the following funds (in addition to managing handling Telkom's fund management activities):
• PT Telkomsel Mitra Inovasi's TMI Fund: this fund focuses on funding startups that can create synergies and value accretion for Telkomsel;
• Centauri Fund: launched in collaboration with KB Financial Group (Kook Min Bank) from South Korea, this fund focuses on growth-stage startups. This fund seeks to support startups in Indonesia and Southeast Asia, especially in startup developing innovative technologies, including financial technology, E-commerce infrastructure, Software as a Service (SaaS), and Big Data; and
• Arise Fund: launched in 2020 in collaboration with Finch Capital Netherlands and which mainly focuses on early-stage Indonesian startups developing innovative technologies.
In 2020, MDI Ventures and startups they collaborated with launched a website dedicated to educating people on COVID-19. This website (www.Indonesiabergerak.com) includes information on areas affected by the pandemic and allows users to report updates.
We believe our emphasis on a corporate culture of innovation allows us to respond quickly to market changes and customers' needs. For instance, in 2020 we have been collaborating with the Government to develop a contact tracing application, one of the tools used by the Government to limit the spread of the COVID-19 outbreak. We have also developed another application to assist the Government and a pharmaceutical company to monitor deliveries of the COVID-19 vaccine, record relevant vaccine data, enable people to register themselves for vaccination and for identification of eligible vaccine recipients to support efficient distribution of the vaccine.