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Uganda's Mobile Tariff Competition: How Low Can You Go? Print E-mail
Thursday, 25 November 2010
Zain/Airtel’s aggressive price cuts in Kenya have dominated the headlines, but in EAC neighbour Uganda, the Indian operators similarly tried to tackle MTN’s market dominance through price cuts. Maya Prabhu analyses how the mobile market in Uganda reacted.

In September 2010, Bharti Airtel marked their takeover of Zain’s Africa operations with an aggressive price war in Kenya, lowering the price of off-net calls down to as little as KES3 (USD0.035) per minute. In neighbouring Uganda, it was another Indian operator who started the fight: At the end of September 2010, Essar-owned Warid slashed per second price rates by 50% to UGX5, and embarked on an aggressive advertising campaign. Zain then upped the ante, cutting prices 60% to UGX3 per second.

Today, UTL, Zain, Warid and Orange all currently offer users a flat rate of UGX3 per second for both on-net and off-net calls, though MTN - who have a hefty 60% market share - have maintained a UGX5 tariff for off-net calls. But with at least three of these companies claiming affordability as their particular mandate, representatives of all five companies agree that price competition on Uganda’s mobile market is far from over.

How Low Can You Go?
Right now, cutting local call rates further to UGX2 per second seems unlikely: a 30% tax rate and an interconnect charge levied at UGX131 per minute mean that companies are losing about UGX170 out of every off-net minute’s revenue. Factoring in the money that goes into the distribution networks reveals that already at UGX3 per second, mobile companies are barely breaking even on calls to other local networks.

Indeed, market leaders MTN question the sustainability of introducing profitless off-net calls - even though their dominant position on the market means that, proportionally, they are likely to incur fewer interconnect charges. Commenting on their slightly higher per-minute and per-second tariff plans (UGX180 on-net/UGX240 off-net, and UGX3 on-net/UGX5 off-net respectively), Chief Marketing Officer Isaac Nsereko said, “In a business like this you have a lot of stakeholders to look after. In the long term, if you only please some of the stakeholders, you’re not sustainable. In balancing pleasing customers, staff and shareholders, this is the best deal MTN can offer.”

As a comment on his competitors’ financial strategies, Nsereko’s comment is, at most, implicit. Orange’s Edouard Blondeau, Chief Officer – Program Office, Strategy & Broadband, is more outspoken: where a call to another network costs the company UGX170 per minute, there is only a UGX10 margin on Orange’s UGX3/second off-net calls. But 10%, or UGX18, goes into the distribution network, so the company is actually making a loss on off-net calls. On-net call margins and received interconnect payments might manage to breach the divide, but ultimately this is a matter of banking on the future. “The price war is going to be a long-term battle,” said Blondeau, “In the end, shareholders will have to decide how long they want to play, how long they want to sustain the loss [...] but we are determined not to leave the space.”

Despite being reluctant to formally comment on rival companies’ performances, Blondeau added that, as far as he knew, Orange was not the only company to be making a loss since the recent intensification of price-based competition. While representatives of the companies in question have been reluctant to comment explicitly on their profitability, one industry insider stated that his understanding of the situation was that MTN is currently the only cash-positive player in the market.

Off-net call prices at least seem to have bottomed out – for now. So with representatives of the companies claiming that the price war is far from over, what’s next?

Getting Creative

Having hit this cost barrier, companies appear to be seeking out more creative angles on competition.
  • The latest frontier is airtime, with Zain releasing UGX200 airtime vouchers, the lowest denomination to date. UTL offers airtime at denominations of UGX250 if purchased through their mobile money platform, M-SENTE.
  • Conditional tariff offers is also becoming an arena of battle: For instance, Warid recently launched Kawa, a permanent deal allowing customers to spend only UGX1 for four seconds on on-net calls, conditional on their purchase of at least 30 minutes worth, or UGX500, of airtime. Another example is the recently launched MTN Friends, allowing subscribers to designate four other MTN users as ‘friends,’ to whom calls will cost as little as UGX1 per second.
Renewed marketing campaigns and bonus features on existing offers might act to consolidate customer bases which have been potentially destabilised by competitive offers from rival companies:
  • Warid’s successful Pakalast profile (which offered users a day’s free calls after a UGX1500 airtime purchase), for example, is being marketed with a third consecutive free, making the product effectively UGX500 cheaper.
  • Isaac Nsereko of MTN said that the popular MTN Zone profile, which offers subscribers tremendous discounts during low-usage periods, will probably be reducing its undiscounted rates by a few shillings.
Hardware marketing too may experience something of a change. In the run up to the recently intensified price-based competition, both Warid and Orange were selling dual-sim phones. Now, Warid is offering this phone at UGX55,000, with a free UGX75,000 worth of airtime.

Mobile money will predictably play a significant role. MTN’s Nsereko commented on the ability of his company’s MobileMoney, the most successful mobile financial service in Uganda, to act as a customer loyalty creation tool. Long planned, Orange Uganda will launch its mobile financial product soon.

These dynamics may provide an insight into the immediate response of Uganda’s mobile market to the cost-dependent barrier it has encountered during this price war, but in the longer term, the course of competition may well be heavily determined by the Uganda Communications Commission (UCC) and their potential to impose a lower interconnect charge.

A Longer-term View
Although communications prices are currently at an all time low for the country, globally speaking, the cost of a call is still high in Uganda. Warid’s CEO, Madhur Taneja, said key players in the industry are talking to the UCC, but it may take awhile for the interconnect charge to drop: 18 months ago, the UCC published a report placing the appropriate interconnect charge at around UGX91, yet the charge remains at UGX131. Taneja imagines that if a similar analysis was carried out now, the appropriate level of the interconnect fee would be placed closer to UGX60. Meantime, some companies are reportedly in the process of negotiating alternative, bilateral interconnect deals.

Mark Kaheru, Marketing Communications Manager for UTL, stressed that there is still room for the price war to spread. “Today, we’re talking about price war on voice calls,” he said. “There are so many more products on the market [...] where prices could drop. For instance, we’re the largest ISP, and charge UGX60,000 for 30 days unlimited download. The competition charges UGX15,000 for 300MB.”

Looking even further ahead, MTN’s Nsereko says, “We expect that a few players will sail out.” Broadly speaking, competitions have winners and losers. It’s too early to tell who these will be, but the question warrants a look into who might be feeling the squeeze.

Winners and Losers?
While company representatives seemed reluctant to provide figures representing recent trends in subscription and usage, it seems a constant that all the companies are experiencing relatively steady growth in their customer base, with an increased volume of calls.

MTN’s 60% market share and formidable brand strength, aided in part by its roughly 1.3m MobileMoney subscribers, mean that the company is indisputably in a position of strength. Nsereko argues that price-based competition is not new to 2010 – the price war has been ongoing since MTN’s arrival on the scene 12 years ago, and the recent race to drop prices is at most a ‘price battle,’ he claims. Further, MTN is a survivor: “Over the last 12 years MTN is the only company that has not changed brand, or ownership: the others were playing an unsustainable game. Our view is: If it isn’t sustainable, we won’t go there.” Nsereko expresses no doubt about MTN’s security in the Ugandan market, but also seems certain that if this price war is to have a winner, it will be his company that takes home the prize: “Battles for consumers will be tougher, but the fittest will still succeed.”

Nsereko also feels unthreatened by the incursion of large Indian companies like Bharti and Essar into the Ugandan mobile theatre – Bharti’s minute factory model, he implies, might founder in smaller, less developed markets where avenues for outsourcing are narrower.

However, although MTN still have not lowered prices to match their competitors – out of a sense of security, and a focus on sustainability – it was only in November that MTN lowered the tariff for off-net calls from UGX6 to UGX5. While Nsereko would not disclose figures on recent subscription trends, Orange’s Blondeau says: “If they dropped their rates, there was probably a good reason to do it.” And indeed, while MTN is unlikely to be one of the companies that bows out of the race, there is a chance that the price war has been successful in at least partially destabilising MTN’s overwhelmingly dominant position.

Orange, a relatively recent entrant on the market, and admittedly weakened financially by the price wars, is nevertheless tailoring its approach to the market a little more specifically. Rather than throwing its cap in for the fight for mass appeal, Orange seems to be aiming rather explicitly at Uganda’s urban middle classes. Where ‘value for money’ must surely be the keystone in all the competitors’ strategies, Orange plans to focus investment on the value-side of the equation, concentrating less on being the most affordable of Uganda’s mobile service providers. “There are reasons that customers choose orange, and I don’t think it’s related to the price war” says Blondeau. And indeed, Orange claims the widest 3G+ network in Uganda, ideal for travelling business men using their smart phones as a portal into the working world, and prides itself on the lack of congestion on their network as well as ‘crystal-clear’ call quality. In Orange’s case, ‘banking on the future’ hinges on the hope that the price war does not derail the company before it manages to establish itself in its intended niche.

Given the time it took the company to respond when Zain upped the ante, there was speculation that Warid was not equipped to deal with the price war they had started. But CEO Madhur Taneja is confident about his company’s position: The growth in minutes use has, in a matter of weeks, entirely compensated for the price cuts, says Taneja. Furthermore, he says the company has been growing at an admirable pace over the past several months, and while the expansion of the customer base has not accelerated, it has not slowed down at all either. Taneja also says that the Warid brand is capitalising on Essar’s experience: “We are not in a different world which we don’t understand” he asserts, and refers to Warid’s recently-won UCC innovation award as evidence that the inherited knowledge is being put to good use in Uganda. The fact that the company is eschewing promotional deals, that all their new offers are permanent, puts weight behind Taneja’s claim that Warid, despite being relatively new on the scene, is trundling down a longer road. The industry as a whole should see a real penetration of 60% in three years time, he says, and Warid will definitely play a constructive and significant role.

UTL, the only exclusively Ugandan company, is financially the most vulnerable on the market. Marketing manager Mark Kaheru says: ‘The truth is we have the shallowest pockets [...] We’re Ugandan, our funding is here. We don’t have grandfathers and grandmothers abroad; what the market gives us is what we have to spend.” Despite his claim that there has been a ‘moderate acceleration’ in subscriptions since the beginning of the price war, it is difficult not to sense that UTL is lagging behind. “The issue is, if people had been really listening and watching, they would know that everybody was cutting their prices to match ours,” says Kaheru. And it is true: UTL has traditionally offered the cheapest deals on the market.

But rather than an affirmation of the company’s quality, Kaheru’s statement reveals UTL’s potentially crippling problem of brand weakness - what’s the use of offering the best deals if nobody knows? Warid’s highly successful Pakalast, says Kaheru, was virtually an imitation of Endobo – but the rival companies can “afford to scream and advertise. We can’t afford it.”And yes, UTL has plans for expansion: 300 new base stations will be set up in rural areas. And yes, UTL is, as Kaheru underlined, the largest ISP in Uganda. But, crucially, UTL has now lost the advantage of offering the most affordable calls on the market. Fettered by limited brand visibility, will UTL continue to compete?

Worse, UTL seems to be caught up in a scandal over the non-payment of interconnect charges. MTN, currently in court with UTL, refused to comment, but Blondeau at Orange said: “UTL demand UGX150-180 for interconnect... but they don’t really pay it.” Warid’s Taneja said, “UTL owes everyone in the industry a huge amount of money – they just don’t pay their interconnect. This has been a perpetual issue with UTL.” Warid, for one, has been reluctant to isolate UTL as a result of their unwillingness to pay their dues, out of a loyalty to customer convenience. But perhaps, with the entire industry under financial strain from increased competition, more companies, and not just MTN, will move to make UTL pay up – which will put further pressure on what Kaheru alleges are already weaker finances.

And Zain? Caught up in the midst of the rebranding process, spokespeople were difficult to get hold of. But industry insiders speculate that Zain will be the company to spur the price competition onwards. It was Indian-owned Warid and Zain that kicked off the price war between them – and neither seems to have much intention of easing off. Marketing manager, George Buza did comment that “it’s not only about price competition,” but continued: “Our Market has consistently shown that it is price sensitive and as such we expect to see a lot more price point reactions.” Despite outsiders’ doubts, Buza says that the minute factory model (based on large-scale outsourcing ) has had a very successful beginning. The customer base is reportedly growing, and revenues have not dipped since the start of the price wars. With giant Bharti at their back, and a strategy in place to become the “most beloved brand in the daily lives of people in Africa” by 2015, Zain-now-Airtel are expected to keep pushing aggressively on mobile tariffs.



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