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Gloves off in fight over mobile termination rates

By KENNETH KWAMA | May 22nd 2012


The row over termination rates masks the bigger problem in the mobile telephony sector: dwindling revenues from voice traffic.

Airtel and yu are incensed that the Communications Commission of Kenya (CCK) put on hold plans to lower call termination rates, also known as interconnection fees.

But the industry is entering a new cycle where both prepaid and postpaid subscribers are spending shorter periods calling on all networks, squeezing revenue margins.

As a result, a tariff war unleashed by the two is not translating into substantial growth in voice revenues that were for long their bread and butter, although they appear to have gained more subscribers.

But the two also feel they are paying too much to Safaricom in call termination charges.


As the biggest sector player by subscriber numbers, Safaricom rakes in more money from charges on calls terminating on its network that have to be borne by its rivals.

Airtel gains the most if the interconnection rates are lowered. Latest statistics from CCK show that Safaricom accounted for nearly 80 per cent of most calls by Airtel subscribers to other networks.

In total, Airtel subscribers spent 429 million minutes calling other networks in the three months to December last year, compared to 427 million minutes within Airtel’s turf. Airtel paid out Sh948 million to rivals as interconnection fees.

Unfortunately for Airtel and yu, they cannot pass on the full load of the charges to their subscribers, as it would mean eating humble pie and accepting the warning by former Safaricom CEO Michael Joseph (now Vodafone director of mobile payments) that their price war would ultimately fail.

Cumulatively, Airtel, yu and Orange have paid Safaricom over Sh10 billion in the past five years as inter-connection fees.

The operators have accepted that voice has lost its mojo and the future is data. Orange and Airtel recently upgraded their networks to cater for this growing revenue stream that is currently dominated by Safaricom.

Airtel and yu, which have pegged the battle for customers on a low-priced call regime, want CCK to carry on with an earlier agreed reduction of mobile termination rates (MTR) — the amount of money mobile firms pay each other for calls that terminate in a rival’s network.

President Kibaki suspended implementation of the proposed rates last year, following protests by Safaricom and Orange who said the revised figures were unfair and a threat to their operations.

The review by CCK was based on a study by an international firm Analysis Mason that compared Kenya’s interconnection charges with other countries and concluded they were too high, a position rubbished by Safaricom and Orange.

“We are in the business and trying to offer affordable tariffs to our clients. But the tariffs cannot come down to levels that will benefit customers when other operators cut into other operators‘ earnings,” says Airtel Kenya Managing Director Shivan Bhargava.

leaky balance sheet

“Out of the Sh3 we earn for calls that terminate outside our network, we pay out Sh2.21 to other networks and a further 26 per cent as tax to the Government.

About 65 per cent of the total calls are off-network and this is the revenue stream that Safaricom is trying to protect,” says Shivan.

But speaking on the sidelines of a meeting called to release the company’s annual results, Mr Bob Collymore, Safaricom’s chief executive officer denied claims they are fighting implementation of MTR.

“We have engaged CCK on the issue and it wouldn’t be prudent to comment on it while it is still being tackled,” said Collymore.

But he said Safaricom asked the regulator to commission a fresh study of the mobile tariffs before settling for proposals contained in the earlier shelved report that recommended a gradual reduction of call termination rates to a low 86 cents.

Under the proposed rates, it would have seen the current Sh2.21 termination fees reduce to Sh1.44 per minute, hence translating to Airtel saving about Sh331 million.

In contrast, Safaricom is estimated to have generated about Sh19.6 billion from the 4.9 million calls that its subscribers made within its network in the quarter to December. It paid about Sh501 million to its rivals as interconnection charges.

growth strategy

Airtel has been particularly hard-hit because it factored the expected reduction of MTR into its growth strategy and had to go back to the drawing board.

Skeptics, however, say lowering the interconnection fees is not the magic bullet for operators like Airtel and yu, as it will likely have minimal impact in the battle to displace Safaricom from its dominant position.

They cite the price wars and number portability, which failed to realise any meaningful gains even though many expected these would help the small players eat into Safaricom’s market share.

The Analysis Mason report — released in 2010 and subsequent implementation of the first phase of its recommendations saw termination rates tumble from Sh4.41 to Sh2.21.

The execution was to follow a glide path that would have seen MTR rates settle at 86 cents per minute by July 2013, but intervention by Kibaki threw spanner into the works.

There have been allegations that the State, through Communications PS Bitange Ndemo, is not keen on a new MTR.

Ndemo has publicly taken a position contrary to that of CCK that has been pushing for the implementation of MTR. Standard Business Weekly was unable to reach the PS for comment.

Had CCK stuck to the suspended implementation schedule, the cost for SMS would have reduced from the current 60 cents per message to 20 cents, while call rates would have dropped sharply.

The move would have hurt Safaricom, which has 67 per cent of mobile subscribers, and benefited Airtel and yu who pitched the battle for numbers on a price war.


The Consumer Federation of Kenya (Coffer) and ICT Consumers Association of Kenya have waded into the controversy saying that non-implementation is against the interests of investors and consumers.

“This phenomenon is a common practice in telecommunications markets where operators with large subscriber bases price their off-network services onerously to discourage their subscribers from calling other networks,” says Alex Gakuru, Chairman of ICT Consumers Association of Kenya.

“Now that Kibaki’s one-year suspension (of the MTR) has ended, new calls to abolish the recommendations should not be entertained,” says Gakuru.

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