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New Telkom Orange fees stun dealers

FINANCIAL STANDARD
By | May 19th 2009

By John Njiraini

The market share battle for mobile services is already being felt at Telkom Orange, just eight months after it launched its GSM services.

Telkom Orange is 51 per cent owned by France Telecom, and the majority shareholder is shutting down the spending hatches, and reviewing strategy, as the sales and marketing war to dismantle the Zain Kenya-Safaricom duopoly, speeds towards crunch time.

The latest sign that the huge spending on marketing and distribution is beginning to irk the French connection at Telkom Orange emerged last week, when the lid came off a dispute between it and a section of its business partners, over a decision by the firm to review their commissions.

Telkom’s plan is to pay commissions only when sim (for GSM phones) and ruim (for CDMA phones) cards are activated. Speaking to Financial Journal (FJ), Telkom’s Deputy Chief Executive Peter Reinartz said the new structure is intended to improve Telkom’s distribution channel, and will in fact earn the dealers better commissions, when they sell products with bigger value — like an Sh1,000 airtime card that attracts a commission of 17 per cent.

The company appears to have made up its mind on the matter, and during a meeting last week with dissenting dealers, it only agreed to an extension of the deadline to June 2, for them to sign the new contracts.

As expected, some of the dealers reacted sharply, opposing the move and threatening to decamp to rival networks.

Already with 800,000 mobile subscribers, and engaging in an aggressive push for a bigger market share, the French connection now running Telkom appear ready to absorb any negative outcome, and look unlikely to change their mind on the matter.

That they would like to close the door on the matter is not in doubt, as given the fact that the fight for market share is now increasingly brutal, and any lingering speed bumps must be levelled quickly, if they are not to prove fatal to the product marketing and distribution chains.

negative feedback

Deputy CEO Peter Reinartz downplayed the negative feedback from the dealers.

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"Dealers are very important to us. We value our relationship which is subject to improvement," he told FJ.

Orange became the country’s third mobile network operator in September 2008. This was after France Telecom acquired a majority stake in Telkom Kenya in November 2007.

The latest impediment comes only weeks after France Telecom, the parent company, said it would invest Sh8 billion in Telkom Kenya this year, to optimise its mobile and CDMA networks.

In an attempt to put a lid on the standoff, officials of the Telkom Partners Association met Telkom managers on Monday, in the firm’s Mass Market Department, but only agreed to extend the period for dealers to sign the new contract.

"What we want is good for the dealers," said Paul Miti, the deputy head of the department.

And on Thursday, all the dealers had their own meeting, during which they agreed to give dialogue a chance, before deciding on the next course of action, if the issue is not resolved by the deadline.

"We are engaging in a spirit of collective bargaining, and we are hoping to reach a consensus," Ismail Thande, the association chairman told FJ on telephone.

According to Reinartz, some of the dealers not willing to commit to the partnership could be looking at short-term profits rather than the bigger picture.

He reckons that at least 50 dealers have signed the new contract ,and the company will review its relationship with those who refuse to reach an agreement.

distribution crisis

"We want committed and serious dealers," he said, adding that the changes are in the interest of the dealers in the long run.

Orange Indirect Sales Manager, Bethwel Opil dismissed the possibility of a distribution crisis, maintaining that the company would ensure that its products reach the customers.

While the company is confident most dealers will agree to the new terms, it intends to deal with dissenters case by case.

The standoff revolves around a letter addressed to Telkom’s 360 dealers, of which Financial Journal (FJ) has a copy. In it, the firm unveils a wide range of changes to its Mass Market Department.

They include merging the dealer and distribution channels and re-naming it Indirect Sales Partners. The restructuring, notes the circular, would increase commissions on airtime, depending on the order quantity.

compliance

The changes also require distributors who are not dealers to comply with the Dealer Operating Standards within three months, and exclusive dealers who are not distributors to formulate a route map, so as to facilitate airtime distribution.

However, the decision to revise the commission structure for all products and demanding that all partners sign an addendum to the existing contract between May 11 and 26 that has not gone down well with some dealers. "This new strategy and commission scheme should allow us to achieve and exceed our targets and objectives together," states the circular dated May 7, and signed by Thomas Bonnet, the Head of Mass Market and Customer Service.

Under the new structure, a partner will be required to buy sim and ruim cards at retail prices, and the commission would be based on activation, rather than sales. This means that it is only when the cards are active (in use) that a dealer qualifies to earn a commission, unlike at present, when the commission is earned immediately one sells such devices.

credit note

"Each month an automatic count will be done for each partner and the commission, which shall be paid on the 10th of the next month, would be given by a credit note to use for the next purchase of Telkom Kenya products," indicates the Bonnet’s circular, a position that deviates from the preferred cash payments.

Under the new structure, an activation of 10 to 100 lines that used to attract a commission of Sh400 will now be paid at Sh100.

This is a significant reduction, considering that leading services provider Safaricom and Zain pay commissions averaging Sh350 for the same number of lines, while Yu, the latest market entrant pays Sh700.

In the case of sim and ruim, if there is no top up on the activated line during the first 30 successive days, the residual would be cancelled, and Orange would recover the amount through a 100 per cent claw back from its partners.

business sense

The commission reduction also applies for devices — a telephone with a sim or ruim card. For instance, a device with a retail price not exceeding Sh1000 that used to attract a commission of Sh350 will now attract Sh140.

Also affected are commissions for airtime. Under the new terms, if a dealer purchases a quantity of between 10 and 5,000 of Sh20 value of airtime, the total commission would be nine per cent, down from 12 per cent.

But if the dealer meets the quarterly targets in sales, he would be entitled for a two per cent commission that would be redeemed as airtime.

"The new commission structure does not make business sense to us (dealers) because we are not going to make any profits," one dealer told FJ on condition of anonymity.

He, however, hopes that Orange would back down on the new terms to freshen up the waning relations with its business partners.

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