Telecoms warm up for second bout

By Kenneth Kwama

Effects of the price war in Kenya's mobile market is beginning to impact negatively on operators' bottomlines as revenues from voice services, which has long been considered the staple of the mobile world takes a beating.

The country has seen a price war in the mobile market as operators including Safaricom, Airtel, yu and Orange scramble for market share.

The battle gave way to a new regime that has seen call rates tumbling down as companies battle to attract new customers or retain existing ones on their networks.

The pull-down effects of the price wars have emerged amid speculation that one mobile operator could be planning to ignite another round of price wars by pulling down its call rates even lower.

According to a highly placed source within the industry who does not want to be named because of the sensitivity of the matter, the company wants to use the price cuts as a strategy to lure more customers to its network.

If the company acts on its plans, it will adversely impact the profitability of cell phone service companies that are already struggling with declining average revenue per user.

In the past three months, the average revenue per user in the industry has significantly dropped across the board as people make longer calls for less.

Scratch cards

Mobile companies have also been increasing the print of lower denomination scratch cards to conform to fresh needs of a clientele that is slowly shifting from high-denomination scratch cards.

"This is happening because customers are no longer spending as much as they used to on core services like voice and short message service (SMS)," says the source.

He says as a result this competition, people can now get more talk time for less money and send a comparably higher number of messages at more affordable charges.

Mobile operators are now turning to value-added services and looking at non-traditional areas like data to boost revenue and margins.

To steady the leaking revenues due to the cutthroat competition, telecom operators are gradually shifting their attention from voice to data, an area Safaricom comfortably commands.

Airtel will begin rolling out 3G services in the first quarter of 2011 as part of a push for more customers and a return to profit since Indian Bharti Airtel acquired it.

Airtel Kenya Managing Director Rene Meza said the firm will be subsidising laptops and Internet-enabled handsets to drive data use in the country.

Orange Telkom too is set to widen its lead in the data market. The company has been awarded a 3G-Spectrum licence by the Communications Commission of Kenya (CCK).

The nod paves way for the roll out of high speed Internet services early next year.

This follows the completion of successful 3G tests carried out countrywide by the company over the past one year.

The roll out of the 3G network is part of the company’s strategic plan aimed at increasing the operators’ competitiveness, in the data market.

Safaricom is already way ahead of the pack in the data market having made strategic acquisitions of WiMax operators aimed at reducing its reliance on the voice market.

Safaricom has in the past acquired One Communication, Packet Stream Data Networks, Instaconnect, and IGO Wireless.

Indications that the voice market was headed for the rocks came alive after the country’s largest mobile company by subscriber base, Safaricom, announced increased profit and a paltry 7.8 per cent growth in voice.

Incidentally, revenues from its money transfer service M-Pesa and Broadband data increased by 137.6 per cent in what the company said was part of its strategy to reduce dependency on voice revenues.

Currently, Safaricom commands close to 80 per cent of the country’s mobile market share after its subscriber base grew by 18 per cent last year. This means other operators — Airtel, Orange and yu share the remaining 20 per cent.

The fact that nearly all of Safaricom’s competitors rely more on voice and SMS for business has shifted muted attention on their businesses, leading to questions about margins and how they are coping.

But Essar Telkom’s Country Manager Atul Chaturvedi says the reduction of phone tariffs is good for the industry because it has inspired mobile phone usage.

"There are more customers and people are a bit carefree with calls and average minute per user has gone up, which is good for the industry," Chaturvedi says.

He, however, admits that people are not buying as many scratch cards as they used to before the price reductions, but says the situation will improve because the reduction is enticing more subscribers who will drive up usage of mobile phones.

Mobile phone tariffs in Kenya are already low with an average tariff of about Sh3 a minute for local calls.

Orange’s Chief Executive Officer Michael Ghossein says the price wars are not good for the mobile market.

"They price war are intended to add value to customers, but unfortunately, it is not positive because some operators are not looking at the bottomline," Ghossein says.

"It means many businesses will not have enough revenues to position their businesses for future."

All the operators have introduced services such as data, Internet and mobile entertainment in bid to complement the declining revenues from voice and short message services.

However, the value-added services still account for paltry percentages of operators’ revenues with the exception being Safaricom, which netted Sh7.5 billion from its money transfer service M-Pesa and Sh2.9 billion from mobile and fixed broadband data in its last results.

Bend over war

Although there have always been streaks of battle over price cuts, Airtel (then Zain) ignited what would later be referred to as the bend over war when it reduced its calling rates to Sh3 to any network with a rider that specified the offer was permanent and came with no terms and conditions.

Airtel’s price reduction completely changed the game and for some days, long queues formed outside its outlets as people scrambled over themselves trying to buy the firm’s SIM cards to benefit from the new rates.

Safaricom counter offered, but its new offer had terms and conditions. Subscribers who bought airtime worth Sh100, Sh250, Sh500 or Sh1,000 were allowed to make on-net calls at two bob per minute, while off-net rate for these airtime values was Sh3.

On the other hand, airtime worth Sh5 or Sh10 attracted a discounted flat rate of Sh5 both for calls terminating within and outside the Safaricom network.

This meant subscribers who bought airtime worth Sh50 paid Sh3 per minute for both on and off-net calls while for the Sh20 denomination, the on-net rate was pegged at Sh4 while calls outside the network were priced at Sh5 per minute.

In some way, this saw a reversal of traffic to Safaricom (after they matched tariffs), but suggests that the battle is still far from over.

Putting the entire battle in boxing terminology, no meaningful challenger has been knocked out of the ring yet and more rounds are likely to come.

The bout has not ended and likely has more rounds, punches, and counter-punches ahead.

According to our source, the urban market is already saturated, and new gains in subscribers will have to come from rural markets, where revenue per user and margins tend to be lower.

Focus on emerging fields like data and Internet have also been touted as other new avenues for growth.

In its latest financial results, Safaricom recorded Sh20.9 billion compared to Sh15.3 billion it posted in the previous year.

While its voice revenues increased due to higher subscriber numbers, the average revenue per user declined from a previous Sh7.3 to Sh6.

—Additional reporting by Timothy Makokha