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Safaricom in rare panic mode as bluechip firms go after telecoms’ billions

FINANCIAL STANDARD
By MACHARIA KAMAU AND WANJALA WERE | August 12th 2014
Safaricom CEO Bob Collymore.

Safaricom has in the past been confident, at times even cocky, about competition. Memorable are the many times its former chief executive Michael Joseph talked of the numerous times competition have had an opportunity to ‘eat our lunch’ unsuccessfully.

But the tide seems to be changing and the telco appears shaken by emerging competition. The telling was the admission by its Chief Executive Bob Collymore that the telecoms giant is trying to get its house in order so that it is ready to ward off emerging competition.

In particular, he mentioned the Vietnamese operator Viettel, which has bid to buy a stake in Telkom Kenya (Orange) from French operator Orange. Other firms including Nigeria’s Megatech and South Africa’s MTN are also interested in Telkom Kenya. Collymore last week told Bloomberg during the US-Africa Summit that a successful bid by the Vietnamese could be a game changer.

“The Vietnamese are fiercely competitive and very low-cost,” he told Bloomberg. “When we look at what they did in Mozambique, they changed the game. We’re all going to have to knuckle down and deal with that.” And it does not stop at Viettel’s planned entry into Kenya.

Mobile operators

The Communications Authority of Kenya in April licensed three Mobile Virtual Network Operators (MVNO), who will use infrastructure put up by existing mobile operators on a commercial basis to launch services similar to those offered by mobile telephony firms.

The MVNOs licensed earlier this year were Equity Bank’s subsidiary Finserve, Tangaza and Zioncell. Last week Thursday, national carrier, Kenya Airways, announced that it had approached the regulator for a licence to operate an MVNO. While the MVNOs are at different stages of rollout, it is Equity Bank that may be giving Safaricom the chills.

Equity Bank, which is already testing its MVNO and expects to launch soon, is in plans to convert its nearly nine million banking customers into mobile customers. This will be by offering them all the services they are currently getting from mobile operators– voice, data, mobile money and other value added services. Being a bank, its stronger proposition is a seamless interaction between the customer’s bank account and their mobile money account, adding that this will be at a lower cost.

Peter Wanyonyi, a telecoms analyst said Viettel could be a threat to Safaricom’s dominance in Kenya, going by the operator’s experiences in Mozambique as well as coming from Vietnam, a country whose development parameters compares well with those of Kenya.

He notes that if it gains entry into the Kenyan market, the firm might be able to succeed where Orange of France and Essar of India have failed as it has the understanding of ‘poor markets’. “Viettel can be a significant threat to the established order in Kenyan telecoms,” he said.

“Our current telecoms market space is characterised by a stasis of sorts – Safaricom leads in both innovation and revenues, while everyone else tries to copy what Safaricom offers, in the hopes of getting some crumbs off the Safaricom cake.”

Local experience

“Viettel is different. The Telecoms investment climate in Africa has generally been one in which a highly-developed country’s telecoms giant - like Vodafone, or France Telecom - invests in a poor African country. It is largely a top-down approach to telecoms, one which lacks the poor-country experiences that are commonplace in Africa.”

Viettel has operations in Laos, Cambodia, East Timor, Mozambique, Cameroon, Haiti and Peru. It has recently announced plans to invest in the Democratic Republic of Congo and Tanzania. “Vietnam is a poor country, one whose GDP per capita is roughly the same as Nigeria’s and just above Kenya’s. Viettel is therefore expected to better understand market dynamics in Kenya as compared even to Safaricom - whose major decisions, as well as chief executive officers, are seconded by Vodafone after experience in developed markets.”

“The fear therefore is that Viettel will be more in tune with the requirements of poor countries - it might content with very thin margins, as compared to the relatively high profit margins imposed on Safaricom by the demands of Vodafone shareholders. Safaricom is right to be worried about Viettel - especially since Viettel showed in Mozambique that it goes into all sectors, from wireless to fixed line operations.”

Wanyonyi notes that the MVNOs are looking areas that have been neglected by Safaricom and to an extension other operators. While some of these neglected areas might be niche markets, they still have potential to earn the new entrants good money, like the roaming segment that attracts generally moneyed people but remains poorly served.

“The MVNOs proliferating are answering pent-up demand in niche markets that Safaricom has not bothered to address. Equity Bank and Tangaza are looking to service the neglected cross-platform mobile money-transfer market. Kenya Airways is likely looking at the woefully-undeserved roaming market, and looking to make money from it,” he said.

“Roaming outside East Africa is still a painful and expensive process, and if KQ can make partnerships with overseas operators that then pass cost savings to East African travellers, they will have found a niche to make money from.”

“Mobile telephony, however, is very sensitive to quality of service and the sort of customer service provided. KQ is notoriously poor at customer service, and has hardly distinguished itself in the quality of its services. KQ will have to significantly improve on its customer service offerings to make money from this.”

yuMobile

Dobek Pater, managing director, Africa Analysis – an ICT sector consultancy firm – noted that Viettel’s strategy of low rates – which yuMobile and Airtel have tried in Kenya – has worked in Mozambique.

He however notes that this could go either way should the firm gain entry into Kenya, given that the call rates are already low in Kenya and that mobile penetration is high in the country.

“I think, Safaricom’s concern is that Viettel has been aggressive and also successful in Mozambique. Within a space of two years, it has captured almost 25 per cent of the market (its market share) and has also begun to deploy fibre. Safaricom may have also been wary of Airtel’s entrance into the Kenyan market, but quickly realised that Airtel’s strategy was not working as anticipated,” he said.

“In Viettel’s case, the low-cost strategy is actually working. However, one needs to bear in mind that markets differ and the level of price sensitivity may differ,” he said. “The Kenyan consumers may be on average less price sensitive than their Mozambican counterparts, and prices may already be at a lower level in Kenya than they were in Mozambique at the time of Viettel’s entry into that market.”

“Moreover, when Viettel entered the Mozambique market, population penetration stood at less than 40 per cent, which meant there was quite a bit of greenfield opportunity for an operator that willing to aggressively compete on price.

Greenfield opportunity

Population penetration in Kenya stands at over 70 per cent, which means the greenfield opportunity is a lot lower, and it is more difficult and expensive to churn customers away from existing service providers.”

He added that there are few MVNOs in Africa, citing Virgin Mobile in South Africa as the only one operational, adding that they are not likely to have a huge impact on the operations of the conventional operators. “Whilst the MVNOs, if successful, will take some market share away from (probably) all of the operators in the market, however, my view is that they will remain relatively small,” he said.

“KQ’s success will depend on the ultimate offering, for instance what roaming offerings it will have or what will be the total value package, will a customer receive airtime credit for every air ticket purchase,” said Peter. “It is obviously targeting the top end of the market (those who can afford to fly and travel) and if successful, could churn some high-end subscribers from Safaricom – a few but worth a lot in relative terms.”

Pater notes that M-Pesa is the one edge that Safaricom has that might still keep it in the game even with increased competition. “One strong factor that Safaricom has in its favour is M-Pesa, which generates a lot of “stickiness” for the operator.

M-Pesa users

By now, with over 20 million users, and an extensive ecosystem built up around it, it is very difficult for existing M-Pesa users to change networks, which do not offer the same extent of mobile financial transactions to a large community,” he said.

Safaricom has recently opened up its M-Pesa agency network to competitors, relaxing the exclusivity that was a requirement for many agents. Safaricom’s army of agents, who were instrumental in the growth of the mobile money service and numbering at over 81,000, can now sell products offered by Safaricom’s competitors.

Losing control of its agents at a time when competition is expected to go several notches up might see the operator lose an edge that it has always had and could prove to be a challenge in the firm’s quest to retain keep the distance that has always existed between itself and the number two.

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