Yearlong battle over report contents expected to rip opinions apart

Intrigues at the Communications Authority of Kenya (CA) are set to hit fever pitch when the report on the state of competition in the telecommunications industry is released on February 20.

The authority, whose boss Francis Wangusi was kicked out last month, is expected to make public the radical recommendations in the report that has over the last year come to be referred to as the dominance report.

It was authored by Analysys Mason, a British Consulting Firm hired by the CA, after a study of Kenya’s telecommunication market.

The yearlong battle over contents of the report are expected to rip opinions apart.

The draft report, which leaked to the media early 2017, shows that some players are dominant in certain segments of the market. For instance, Safaricom controls more than three quarters of the voice market - what rivals say has made it impossible for them to flourish.

Airtel and Telkom Kenya, according to the UK firm, are the least profitable players in the emerging market.

CA is expected to invite stakeholders to give their views on the Kenyan telecommunication industry and how to address concerns by players.

DEFENDED POSITION

Safaricom has defended its position and said it has grown organically and benefitted from huge investment in the market coupled by staying ahead of the curve with innovative products, including the recently launched Masoko e-commerce platform.

The firm has in the past accused the regulator of trying to help its smaller rivals rather than focusing on consumers.

Also within the year, new players such as Jamii Telecom have entered the market and have a strong pitch for digital business which may change the outcome of the data space in the future.

Safaricom, whose biggest shareholders are Vodacom SA and the Government of Kenya, in addition to some 600,000 retail investors, has been accused by rivals of unfair practices.

By virtue of being the most profitable firm in Kenya it, however, doubles up as the largest taxpayer and the biggest employer – directly and indirectly.

Airtel Kenya, on the other hand, is owned by Bharti Airtel, a leading global telecommunications company. It boasts of more than 300 million subscribers globally.

“Should Kenya split Safaricom to sacrifice it on the altar of a global giant? How much have they invested in the network in Kenya?” an industry source posed.

The source added that Airtel (then Kencell) was once the leading telco in Kenya and evidence exists to that effect. It then got a fierce rival Safaricom in a two-horse race for customers.

“The rain began to beat Airtel’s predecessors on failure of strategy rather than a skewed playing field,” the source said.

The firm’s low-cost model, also known as Minute Factory Model, has been failing to an extent even in India. When Bharti Airtel entered Kenya through the acquisition of Zain’s Africa operations in 15 countries, it cut calling rates by more half with the anticipation that this would attract more subscribers. It did not happen.

Dobek Pater of Africa Analysis, a firm that tracks telecoms industry in Africa, said: “The model is premised on price competition, effectively. However, price competition by its own virtue results in a perpetual downward price spiral.

“To continuously compete on price and be sustainable as a business, the input costs must be continually decreasing. This is difficult and it is a lot easier to achieve if you are a large, rather than a smaller, entity,” he said.

Airtel Kenya, Pater said, tried to compete on price but it did so against a much larger competitor who can more easily sustain price competition.

“Perhaps Airtel did not focus sufficiently on competing on innovative services and the quality of services. The size of Safaricom (and the stickiness factor it has developed through M-Pesa) makes it very difficult for any operator to compete against it, unless it is only niche competition,” he said.

Nairobi-based investment analyst Aly Satchu in a recent interview cited a wrong strategy for the challenges Airtel has faced in Kenya informing the persistent exit plans.

“Airtel embarked on a Kamikaze price strategy. This failed in part because the Airtel brand, whilst meaningful in India, was meaningless in Africa. Safaricom have been relentless in indigenising their brand,” he said.

“Furthermore, Airtel was outflanked by Safaricom’s M-Pesa, a must have in Kenya, which also meant that it was unable to price customers away from Safaricom.”

Safaricom is fighting to keep premium on its mobile phone money transfer platform.

The Analysys Mason report indicates that Safaricom controls more than half of the services that are rendered in the retail mobile money market in Kenya, regardless of how this is measured.

At the heart of the claims is how Safaricom has refused to open up the M-Pesa platform to its rivals. That move would mean customers of Airtel and Telkom would use M-Pesa like any other application in their smart phones.

The market has, however, moved ahead of the report and two weeks ago, CA launched interoperability on a pilot basis, following agreements between Safaricom and Airtel. This means that Airtel Money customers can receive money sent by users on M-Pesa.

Following the launch, Safaricom said that just like ATM services, interoperability can exist without killing one operator to feed others.

Various studies have shown M-Pesa to be Safaricom’s jewel that provided the highest proposition to customers.

Analysis Mason has proposed the breaking up of Safaricom – with a focus on spinning off the money transfer service.

Justification for the proposal is that more than 80 per cent of mobile money transfers in Kenya are done through M-Pesa.

However, industry data confirms the rise of other providers including Equity Bank’s Equitel. The lender resorted to developing the service after a failed attempt to work with Safaricom – a decision that has proved to be right, going by the number of cash transfers completed and the loans to customers processed.

Equity Group Chief Executive James Mwangi has said daily average transactions have exceeded Sh10 billion.

Equitel is among the innovations that have been cited in global studies that have contributed to the bank’s success.

However, the proposition to hive off M-Pesa from Safaricom has been turned down by the Government.

Information, Communications and Technology Cabinet Secretary Joe Mucheru last year opposed the recommendation by Analysys Mason as well as a proposal by Members of Parliament to have a law that would require the telco to do so.

He said splitting Safaricom would amount to punishing a company because of its success and innovation. He added that it would also discourage investors from putting their money in Kenya.

“It will make Kenya a very unattractive destination for tech companies that want to come and innovate,” Mr Mucheru said.

Airtel has reported some success in the money transfer sector in some markets where it operates through Airtel Money though the grip is in the single digits, according to official data.

Its inability to crack the loyalty that Safaricom has earned has informed a plan by its owners of exiting the Kenyan market.

Airtel has been a strong proponent for the break-up of Safaricom with arguments that other service providers offer better quality on other services and at a cheaper price.

Safaricom’s super profits generated from its control of the market - including a customer base of over 29.4 million - informs the argument on reviewing its operations.

Airtel on the other hand has never reported a profit in the two decades of operation, while Equity is often the most profitable lender – with Equitel projected to provide further momentum.

Thus, Airtel Kenya has been pushing for the regulator to step in and act before Safaricom gets even bigger. It has argued that because of its dominance, Safaricom would easily raise the pricing of all products without fear of losing subscribers to other networks.

Safaricom CEO Bob Collymore has in the past insisted that the split proposal would hurt Kenya’s growth and restrict job creation. He noted last year that economies of Africa need more big players.

“We don’t believe anything we do today is anti-competitive. We don’t believe dominance is a crime,” said Mr Collymore.

Among the recommendations by Analysis Mason is that the firm should be required to give other operators access to its sites in 14 designated counties where there is the largest disparity between its stations and those deployed by the other mobile operators.

The report suggests that Telkom Kenya, majority owned by London-based Helios Partners, and Airtel Kenya are amongst the least profitable mobile operators in emerging markets anywhere in the world.

Industry data also shows that Safaricom has nearly six times as many agents as any other mobile money platform.