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Ratio Blog: Liberation Price War! Print E-mail
Friday, 03 September 2010
This week, Kenya witnessed a revolution. Downtrodden, enslaved masses, freed at last, no longer held at gun point, shackled, abused and exploited.

No, no, not what you think. Not the new constitution. I’m talking about the mobile wars.  

I read around a bit to find out what the presumably young, digital, social-media literate Facebook crowd had to say about this subject on one of the large media houses’ page. It makes me want to hit someone with a dictionary: Among the around 250 commenters, barely one who could actually string a coherent sentence together. And underneath that, a worrying lack of basic business understanding. Here’s a light selection:  

‘Tel them Kenyans didn't use there services willingly bt were forced by circumstances in line with technological dev.’ Is that so? I’m not so very sure how anyone was forced, and Zain tried out the KES8 ‘Vuka’ tariff for both on and off-net calls as early as 2008, then the lowest tariff in the market. Having the same off-net as on-net tariff softens the network effect – even if you want to hang on to your M-PESA account, you can pop in your SIM card for that when required. Yet clearly none of the aggrieved parties posting on Facebook had decided that this offered a way out of their exploitation. I wonder – are they all zombies, devoid of any agency?

‘All ths billions of profit dey make is wat dey hv exploited frm da customers.’ Well. Let’s see, aside from the fact that there were alternatives: Part of that exploited money goes back to owner Vodafone. But then there’s the dividend cheque to Uhuru Kenyatta so that he can pay it into the Treasury’s bank account. That way, technically, a good part of the exploitation goes back to the Kenyan state, and so to the Kenyan citizens, possibly to be spent on roads and hospital. Obviously, it could also end up, somewhat less productively, in MP allowances, but for that, throw a long, hard look at Mr Kenyatta. After the IPO, GoK doesn’t get that big a share of the dividends anymore – now it’s a large number of Kenyan individuals who also ride on the ‘exploitation’.  

Or on Safaricom’s counter offer: ‘why introduce discriminatory prices. Why squeeze the poo?’ You may debate whether such a staggered airtime offer makes sense or not, but squeezing the poo(r) is something everyone does: Milk, sugar, vegetable oil, detergent are all cheaper when bought in larger quantities – economies of scale.  

I also found some optimistic projections: ‘zain will be makin profit like theas dats 20b in a year wait n see by end of nxt year(2011)’. Right now, and in the next year, that’s highly unlikely, not only because Zain won’t make any money with the current rates, but also because they need to invest in technology and systems. And this was the second thing that struck me: A complete lack of bigger-picture perspective.  

Safaricom didn’t start out with 80% market share. I browsed through some old news online: In 2004, when Celtel bought Kencell, the latter’s market share had just fallen from 60% to 40%. Celtel may have had a bit of a whiff of an elite provider about it, but even in 2007, it launched the ‘lowest tariffs in the market’, followed by the Vuka tariff in 2008. Neither one appeared to have helped.  

So today, the Kenyan market offers this interesting conundrum: Competition is good for consumers, and it’s good for Safaricom to have serious challengers. But the second operator in the market, Kencell/Celtel/Zain had let this slip, falling back to less than 20%. In the meantime, Safaricom have used their ‘exploitative’ profits to invest, e.g in the 3G license and M-PESA. As a regulator, how do you deal with this situation? You want to encourage competition to the benefit of consumers– but if the competition actually has a falling market share despite years of presence in the market, what do you do? Punish the company that is successful?

Kenya and Nigeria will be Bharti’s do-or-die markets: large, relatively densely populated – and also both loss-making. I looked at Zain last annual report and in 2009, Zain lost USD46.6m in Kenya. Better than losing USD89.3m in 2008, the Vuka tariff year, but still. In Nigeria, they lost USD125.4m last year, albeit in a far larger market. Within the EAC, Zain Uganda lost USD5.1m, while Tanzania was profitable, but only with USD6.8m. Across the continent, Ghana stands out with a loss of USD79.9m. Other loss-making operations in sub-Saharan Africa in 2009 were Madagascar, DRC and Sierra Leone.  

I suspect that Bharti are probably culturally more suited to tackle sub-Saharan Africa than the Middle Eastern MTC who rather killed off one of Africa’s most successful brands, Celtel, than subject their Middle Eastern subscribers to the ignominy of having to accept an African brand. However, whether Bharti’s business model is transferrable to sub-Saharan Africa is an interesting question: Bharti essentially manage a network of partners to whom all company functions are outsourced – much easier in Indian with its vast outsourcing industry. And then their home market has much higher population density, which will also affect whether their small margin, high-volumes model will work around here.

So back to Kenya: Staving off the losses? Well, not quite yet. With the KES3 off-net tariff, there’s not much money to be made, and the company said it would invest aggressively in its network and agents. Then there’s also the question whether Bharti can grow both their network and systems, including customer service, fast enough. Managing 2m is one thing - will they cope just as well if subscriber figures jump up by one or several millions? And a very sobering comment came from Telkom Orange's Mickael Ghossein: 'We can easily close shop if we charge less than KES3 for off-net calls. The market is in a big mess.'

 
 
Republished with permission from the Star.



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