Air­tel vs. Sa­fari­com

Air­tel Kenya is cut­ting prices to eat into Sa­fari­com’s mar­ket share, but it may not have a big enough war chest and suf­fi­cient pa­tience to suc­ceed in knock­ing the Kenyan tele­coms leader down a notch

The Africa Report - - CONTENTS - By Mor­ris Kiruga in Nairobi

Air­tel Kenya con­tin­ues bit­ing at the heels of Sa­fari­com, but never makes any profit. Is it fair?

Shortly af­ter Sa­fari­com chief ex­ec­u­tive Bob Col­ly­more re­turned to work af­ter a ninemonth med­i­cal leave in Au­gust 2018, he found him­self back in the trenches. In the past two decades, the Kenyan tele­coms sec­tor has had sev­eral scuf­fles over con­sumers, of­ten end­ing up in slashed costs. Air­tel Kenya is us­ing ev­ery tac­tic it can to get out from un­der the shadow of its gi­ant ri­val; these range from cut­ting the cost of calls to seek­ing gov­ern­ment in­ter­ven­tion in or­der to level the play­ing field. “We are see­ing a new price war com­ing,” Col­ly­more told a press con­fer­ence in Nairobi. Days be­fore, Sa­fari­com’s main com­peti­tor Air­tel Kenya, a sub­sidiary of In­dian be­he­moth Bharti Air­tel, had slashed call rates. Air­tel wants to trade rev­enue for mar­ket share. So far, Col­ly­more is in­sist­ing that Sa­fari­com is un­will­ing to par­tic­i­pate in a com­pe­ti­tion over price and will ac­cept to see its vast mar­ket share some­what eaten into by Air­tel, which has been pick­ing

up sub­scribers over the past two years. Air­tel’s strat­egy will test the pa­tience of the share­hold­ers of its In­dian par­ent com­pany, as lower call tar­iffs will fur­ther re­duce rev­enue. Air­tel is fight­ing a price war in In­dia, and is plan­ning to list about 25% of its African op­er­a­tions on the Lon­don Stock Ex­change in 2019 to help it deal with its big debts.

M-PESA’S IM­PACT

Kenya’s tele­coms and mo­bile­money mar­kets are still grow­ing, es­pe­cially with the up­take of mo­bile loans (see TAR103, Sept. 2018). Be­tween April 2017 and March 2018, the mo­bile-money mark e t move d a c o mbi n e d Ksh3.5trn ($34.6bn), a Ksh219bn in­crease from the pre­vi­ous year. Sa­fari­com’s M-pesa plat­form was home to more than three-quar­ters of the to­tal amount trans­acted. In April 2018, for­mer cen­tral bank gov­er­nor Nju­guna Ndung’u, told the Busi­ness Daily that M-pesa “has gen­er­ated a vi­brant econ­omy”. While the M-pesa jour­ney be­gan the year be­fore his ten­ure started, it was dur­ing his time that it be­came a house­hold name. The fight for Kenya’s lu­cra­tive tele­coms mar­ket is dom­i­nated by Sa­fari­com and Air­tel – the lat­ter hav­ing had var­i­ous in­car­na­tions as Ken­cell, Cel­tel and Zain through­out its his­tory. While there are sev­eral smaller play­ers, such as Telkom Kenya and Liq­uid Tele­com, the com­pe­ti­tion is pri­mar­ily be­tween these two main play­ers, with Sa­fari­com the gi­ant and Air­tel the up­start. As of 2018, Sa­fari­com con­trolled 90% of rev­enue in the tra­di­tional tel­com mar­kets of voice calls and text mes­sages. It has 29.5 mil­lion sub­scribers: at least 20 mil­lion more than Air­tel Kenya. In a coun­try with an es­ti­mated pop­u­la­tion of 51 mil­lion peo­ple, Sa­fari­com is in the lives of more than half of the coun­try’s cit­i­zens. But most con­sumers have more than one Sim-card, as one cell­phone-user ex­plained dur­ing a lunch break in mid-oc­to­ber: “I have both so when­ever one low­ers prices, I

use that one, and then switch as they fight on price.” Air tel Kenya’ s at­tempts to in­no­vate in Kenya have not all been suc­cess­ful. For ex­am­ple, it launched the farmer-fo­cused Air­tel Kil­imo in 2013 with the hope of sign­ing up 200,000 cus­tomers by the mid­dle of 2014 for a ser­vice that pro­vides weather in­for­ma­tion, ad­vice and mar­ket prices. Only slightly more than 20,000 had sub­scribed by De­cem­ber 2014, ac­cord­ing to a study by the GSM As­so­ci­a­tion. Tele­coms en­gi­neer Pras­anta Das Sarma has been run­ning Air tel Kenya since Fe­bru­ary 2017. He has been look­ing to repli­cate the suc­cess of Air­tel Bangladesh’s ma­jor growth in cus­tomer num­bers. In its eight years of op­er­a­tion, Air­tel Kenya has never made a profit, de­spite the growth of the tele­coms and mo­bile-money mar­kets. The com­pany has tried to grow through ac­qui­si­tions. It bought yu­mo­bile’s Kenyan cus­tomer base of 2.5 mil­lion sub­scribers in 2014, while Sa­fari­com pur­chased yu­mo­bile’s Kenyan in­fra­struc­ture. In early 2018 Air­tel Kenya ex­ec­u­tives were in talks to ac­quire Telkom Kenya, which has a sub­scriber base of about four mil­lion, but those ne­go­ti­a­tions fell through. Air­tel Africa, the con­ti­nen­tal sub­sidiary within which Air­tel Kenya op­er­ates, has only be­gun re­port­ing pos­i­tive mar­gins re­cently, with its prof­its for the first quar­ter of 2018 tripling to $154.2m from $57.5m the last quar­ter of 2017. Air­tel Africa was said to be con­sid­er­ing sell­ing some of its as­sets af­ter a pro­longed pe­riod with no pos­i­tive re­turns, but man­age­ment has now de­nied that.

THREATS TO LEAVE

Air­tel Kenya has wrested some more mar­ket share (see ta­ble) as the unit bleeds the mother ship. It has changed strat­egy and chief ex­ec­u­tives sev­eral times. In 2015, its manag­ing di­rec­tor at the time, Adil El Youssefi, threat­ened that the com­pany would quit Kenya if the gov­ern­ment did not in­ter­vene and solve the prob­lem of Sa­fari­com’s dom­i­nance of the mar­ket. “We’ve been try­ing for over five years,” El Yous­effi told the Busi­ness Daily, “We’ve lost over Ksh50bn ($495m) and not made even a sin­gle dol­lar in profit.” El Youssefi even­tu­ally left to head yet an­other of Sa­fari­com’s com­peti­tors, Liq­uid Tele­com, but his suc­ces­sor at Air­tel Kenya took up the same fight. In Fe­bru­ary 2017, the Com­mu­ni­ca­tions Author­ity of Kenya de­bated a re­port it had com­mis­sioned from the con­sul­tants at Analysys Ma­son about com­pe­ti­tion in the tele­coms sec­tor. The re­port rec­om­mended that Sa­fari­com should be di­vided into two: a tele­coms com­pany and a mo­bile-money com­pany. M-pesa’s rapid growth has been Sa­fari­com’s ticket to suc­cess (see graph). The mo­bile-money plat­form has given a mere tele­coms com­pany a com­mand­ing role in the new ecosys­tem that links telecom­mu­ni­ca­tions and the fi­nan­cial in­dus­try. By of­fer­ing such a com­pelling ser­vice – money trans­fers, pay­ments and now deeper bank­ing ser­vices – it has made Sa­fari­com’s of­fer more ‘sticky’, in mar­ket­ing jar­gon. But the Analysys Ma­son re­port says that un­less all ex­ist­ing mo­bile-money play­ers in Kenya can in­ter­op­er­ate, then Sa­fari­com’s cur­rent po­si­tion is dom­i­nant and un­fair to other play­ers. Ear­lier this year, a plat­form-level in­ter­op­er­abil­ity sys­tem link­ing M-pesa and Air­tel Money, Air­tel Kenya’s mo­bile-money ser­vice, was launched in an ef­fort to solve the prob­lem. The ques­tion re­mains of how ex­actly the gov­ern­ment can in­ter­vene with­out hurt­ing Sa­fari­com’s rev­enue or a core part of the econ­omy.

LEG­IS­LA­TORS DON’T LIS­TEN

In mid-2018, Air­tel Kenya and Telkom Kenya put up a united front be­fore the na­tional as­sem­bly, which had in­vited se­nior ex­ec­u­tives of all the tele­com com­pa­nies to ap­pear be­fore the in­for­ma­tion and com­mu­ni­ca­tions tech­nol­ogy (ICT) com­mit­tee. Dur­ing the au­di­ence, ICT com­mit­tee chair­man Wil­liam Kip­sang took Air­tel Kenya’s chief ex­ec­u­tive, Pras­anta Das Sarma, and ex­ec­u­tives from other com­pa­nies to task. “Why would you want par­lia­ment to pun­ish suc­cess when one player is do­ing bet­ter than the rest of the telecom­mu­ni­ca­tions firms?,” he asked. In a doc­u­ment sub­mit­ted by Air­tel Kenya to the na­tional as­sem­bly, the com­pany de­manded that the gov­ern­ment act on the rec­om­men­da­tions of the Analysys Ma­son re­port. It said ei­ther the gov­ern­ment de­clare Sa­fari­com dom­i­nant or it must fully im­ple­ment mo­bile-money in­ter­op­er­abil­ity. The chal­lenge proved to be an up­hill strug­gle, partly be­cause Sa­fari­com is a par­tially gov­ern­ment-owned com­pany while the other five play­ers are owned by for­eign com­pa­nies. Sa­fari­com is cur­rently ma­jor­ity-owned by the Kenyan gov­ern­ment and Vo­da­com of South Africa, with a quar­ter of the com­pany owned by the pub­lic. The lais­sez-faire ap­proach to reg­u­la­tion has given Sa­fari­com the chance to grow into the most valu­able com­pany

in the East and Cen­tral African re­gions while its com­peti­tors have con­tin­u­ously strug­gled. Sa­fari­com has also been more sta­ble than its com­peti­tors, hav­ing only had two chief ex­ec­u­tives in its 18-year his­tory. A pe­riod of pro­longed growth was weak­ened some­what by Col­ly­more’s long med­i­cal so­journ. His re­turn should re-in­vig­o­rate the brand. The ques­tion of whether Air­tel will even­tu­ally make money in Kenya is dif­fi­cult to an­swer, as the East African coun­try en­ters a pe­riod of aus­ter­ity and pos­si­ble changes within its econ­omy and pol­i­tics. The Nairobi gov­ern­ment is un­likely to de­clare one of its best as­sets and a sig­nif­i­cant source of rev­enue dom­i­nant. The Sa­fari­com brand has be­come a part of the Kenyan state, es­pe­cially un­der the ten­ure of Pres­i­dent Uhuru Keny­atta. In 2017, for ex­am­ple, it was re­vealed that the trea­sury paid Sa­fari­com Ksh7.5bn to in­stall closed-cir­cuit TV cam­eras and net­works in Nairobi and Mom­basa. The sys­tem runs on the 4G+ spec­trum, whose as­sign­ment to only Sa­fari­com in 2015 was a trig­ger for Air­tel Kenya’s chief ex­ec­u­tive’s threat that the In­dian com­pany would exit Kenya. But Air­tel Kenya could still seek other means to achieve the same re­sult, such as us­ing the courts to get anti-trust laws im­ple­mented. Af­ter eight years with­out pos­i­tive re­sults, it is also pos­si­ble that Bharti Air­tel could choose to quit Kenya, and per­haps other African mar­kets where it has been bleed­ing money. For the sec­tor as a whole, lower prices are likely to hurt profit mar­gins as con­sumers be­come more price-wary, with in­creased taxes on mo­bile money, data and air­time. In Septem­ber, Pres­i­dent Uhuru Keny­atta’s gov­ern­ment in­creased taxes on mo­bile-money ac­tiv­ity from 12% to 20%, while ex­cise duty on air­time went up from 10% to 15%. In the bud­get pro­posal, trea­sury cab­i­net sec­re­tary Henry Rotich said the in­creased rev­enue would be used to fund the uni­ver­sal health­care bud­get. While the two main tel­cos are fi­nan­cial be­he­moths that can sur­vive, their pro­longed fight for mar­ket share is peak­ing at a time of eco­nomic un­cer­tainty. They are un­likely to stop and sue for peace, though the gov­ern­ment could be forced to im­ple­ment the in­ter­op­er­abil­ity sys­tem fully in a bid to re­duce ten­sions. But, stuck in an ex­pen­sive war of at­tri­tion, the com­pa­nies may be miss­ing op­por­tu­ni­ties to in­no­vate. Mo­bile money launched more than 10 years ago – will the next break­through hap­pen in Kenya or some­place else?

If cus­tomers are happy, they do not mind spend­ing more time on your net­work us­ing your ser­vices ” Air­tel Kenya’s Pras­anta Das Sarma ex­plains the ra­tio­nale for its cuts to call prices. I didn’t get the sense from the com­mit­tee that they are look­ing to cut Sa­fari­com down to size ” Sa­fari­com’s Bob Col­ly­more on the par­lia­men­tary hear­ings in Au­gust ugust 2018 2018.

Price wars be­tween the two main ri­vals in the Kenyan tele­coms mar­ket have caused con­sumers to sign up with both, ex­chang­ing SIM cards ac­cord­ing to which firm of­fers the best rates for calls, data and mo­bile money

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