Price pressure

Data could prove to the saviour of Kenya's telecom sector as voice revenues collapse
Operators, Telecoms, Vendors


Bharti Airtel’s entry into Africa in June 2010 made many CEOs of rival telecom operators nervous. With a reputation for forging a successful business model from slim profit margins, most industry insiders expected the Indian operator to launch a price war in its new African markets, and Kenya now appears to be on the front-line of that strategy.

Since entering Kenya, Airtel has already slashed the price of local calls three times, taking the price per minute from KES9 ($0.1) to a new minimum rate of KES1. The move elicited fierce criticism from Bob Collymore CEO of market leader Safaricom, which has a market share of about 80%. Collymore said that such low prices would lead to a decline in investment.

But while Airtel is likely to win over some customers with its new Freelanga Free Kilasiku package, which offers a call rate of KES1 per minute between 6am and 6pm for a daily subscription of KES1, the plan might fail to translate into significant profit.

Joao Sousa, a partner at Delta Partners, a Dubai-based telecoms consultancy, says that many mobile users in Kenya tend to have multiple SIMs to make use of competing offers from the different operators.

“As Airtel is acquiring more new clients, these users also have Safaricom’s SIMs, and so end up having two SIMs. The key issue for Airtel in Kenya is how long the operator can sustain losing money trying to gain market share from Safaricom,” Sousa says.

While Airtel will gain a good market share of SIMs, transforming this into real revenue is going to be very difficult, as they have to keep to gaining the real market share in terms of revenues and margins.”

Furthermore, Airtel which has a market share of about 16%, according to Delta Partners, could also struggle to win customers from Safaricom, which has garnered significant loyalty from its M-Pesa mobile transfer platform.

Mai Barakat, an analyst at Informa Telecoms & Media, a UK-based research firm, said that mobile customers in Kenya “have always had very good loyalty” towards Safaricom. “Though Orange and Airtel entered the Kenyan market, Safaricom’s M-Pesa offers a very strong customer retention tool for them.”

Michèle Scanlon, director, Indian Atlantic Telecoms, a South African consulting practice focused on telecoms in Africa, agrees that Airtel will need more than just low prices to win loyal customers.

“Some price points are headline figures only, but the consumer hones in on that figure,” she says. “Safaricom, as Kenya’s GSM market leader, has the most to lose, although the level of multi-SIM usage is likely to increase through price promotions, meaning operators will gain in the short-term, but may lose out in the longer game of customer retention.”

Scanlon adds that Airtel’s model is focused on “market share and customer numbers”, while Safaricom had already started to focus more on customer value, but would now need to focus on price for market share retention.

Scanlon adds that while Kenya’s mobile operators had already been engaged in strong competition on price before the entry of Airtel, and had been preparing for the arrival of the Indian telco, they were probably not quite ready for the scale or speed of its price cuts.

“Airtel wasted no time in halving voice rates on its arrival in Kenya, and has again slashed rates to a third of that low tariff. However the price war is not just about voice rates. SMS and broadband data access are all being affected too,” she says.

Scanlon also says that the trend is likely to continue for some time yet. “Airtel has lowered the floor price and will likely do so throughout 2011 when it may settle down to focus on profit stability.

“Its competitors will focus on matching some price points, but also by offering value through bundles, and they will have to implement more effective below-the-line communication to their customers for ongoing retention programmes such as personalised campaign management.”

But while Safaricom may be perturbed by the nature of Bharti Airtel’s aggressive competition, it could also help balance the market by helping to break Safaricom’s dominance of the market.

As Shah Kushal, a partner at consultancy Oliver Wyman, says: “Safaricom has been the dominant player for a long time, certainly the last four or five years, and the regulation hasn’t supported the other players to get a foot hold. Normally you have some sort of asymmetric regulation to force competition, but Kenya doesn’t really have a competition policy,” he says.

“The regulator is good, but the lobbying hasn’t worked in the favour of the other operators. Generally the only way they have been trying to build market share is with group price competition and that hasn’t worked, partly because Safaricom has reacted to competition.”

Kushal also points to the success of Safaricom’s M-Pesa platform as a reason for the telco’s continued dominance. “Their control of the M-Pesa platform has meant that they have been able to protect a large part of their base and nobody has been able to get a foothold into that,” he says.

But Kushal adds that the introduction of mobile number portability, which is expected to be introduced into the market in April, could help drive competition. With voice revenues being eroded, Kenya’s telcos are also likely to focus more on data. Safaricom has already launched its 3G network, and Airtel plans to launch 3G services in February.

“The landscape is slowly moving away from voice to data. The opportunity is on mobile broadband,” says Informa’s Barakat. “If you look at mobile broadband subscriptions, in comparison with overall mobile subscriptions, the percentage is very small. This is because the market’s focus on mobile broadband has just started here, and it hasn’t become cheap enough,” she adds.

Sousa points to other issues with 3G in Kenya. He points out that Safaricom’s network is currently “moulded” to voice services and would probably struggle to cope with any significant data demand. “The quality of 3G is not very good as they have too much demand for capacity against cell towers,” he says. However, he adds that this problem could soon be fixed, with Safaricom apparently planning to spend $10 million to upgrade its network capacity this year.

Kushal agrees that data looks set to offer a new area of growth potential for Kenya’s telcos and adds that with new cable connections to East Africa, the quality of data services is rising.

“On the data side, cables have gone into East Africa and the demand is huge, so you will see a lot of mobile broadband taking off, a lot of investment in 3G and I think that is the way they are going to try to get some revenues back,” he says. “All of the SMEs and enterprises would say that their life has become a lot easier, even simple email connections have improved 10-fold, prices have come down substantially and are set to come down further.”

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