The telco space makes a three-way call

By TANIA NGIMA

I remember April 2008 and the events surrounding one of Kenya’s biggest IPOs. Loans were taken, bankers were rubbing their hands in glee over the 15 per cent (on average) interest rates and more than just a few people were already millionaires, if only in their heads. The excitement in the air was palpable.

The Safaricom IPO was one of the most subscribed in the country. I have an acquaintance who, in a bid to beat the 2,000 maximum share allocation, opened accounts in all his family members’ names, including the domestic help.

He offloaded his shares soon after the offering was closed, taking advantage of the 360 per cent over-subscription and making a pretty sum for himself.

PRICE WARS

There have been interesting developments in the telco space in the last six years. The year 2010 saw one of the most vicious price wars in which subscribers got to slash their voice telephony expenditure by up to 50 per cent. Good news for the consumers’ pocket, but it did not bode well for the industry.

There’s a lesson in there for all business owners and aspiring entrepreneurs.

Differentiating your business on a price strategy is not a sustainable model, unless of course, your shareholders have no qualms about posted losses, year on year.

As we have come to learn, slashing product or service prices is a short-term strategy and most organisations use it to gain market share. In most cases, pricing must go up to continue delivery of shareholder value and return on investment.

Because reducing product prices cannot continue unabated without slashing costs, the decision to use this as your main offering to your customers ends up diluting the quality of delivery.

Which is why in 2012, Essar and Airtel followed Safaricom in raising tariffs, a bid to turn profits amid pressure from shareholders.

The modern-day customer is wily and discerning, with an elephantine memory. S/he also has a stack of (hopefully registered) Sim cards at his disposal, one for each major network, and in some cases even a dual Sim handset.

Therefore, if, as a telco provider you slash costs to increase your market share, we will all come flooding, excited at the thought of redirecting our disposable incomes elsewhere.

But when the prices go back up, loyalty be damned, we will simply swap the Sim card and move to where we get more bang for our buck. Blame our elephantine memories.

When former Safaricom CEO Michael Joseph referred to Kenyans’ ‘peculiar habits’, the backlash he received, while possibly unwarranted, was, I think, misplaced and unfair.

Being a ‘peculiar” consumer means I am less predictable and a bit trickier to figure out.

It means that a service provider must work a little harder and engage me just a little more to find out what makes me tick. And this can only be a good thing. But I digress.

Local solutions

Modern consumer behaviour the world over, whether in predominantly B2B or B2C markets, is driven by the same desires.

We increasingly want more value for the same price, we want organisations to continue to innovate and tailor solutions to our specific needs. Simply put, we want local solutions to local challenges.

And therein lies the reason why Safaricom – regardless of whether or not you think MPesa fits within its core purview – is not letting go of its mobile money service any time soon.

If I was in business and I came up with a product that gave me a competitive advantage whether by first-mover advantage or by being suitably responsive to my clients, I would hold on as long as I could.

Enter the newly licensed MVNOs and I have the uncanny feeling that the move may be a particularly disruptive one.

On one hand, the removal of barriers to entry such as heavy capital investment is laudable and timely for current and potential investors.

It is also great news for consumers who, at the end of the day, just want affordable and good quality voice, data and value-add services.

But while everyone is hailing the move, I would like to play the devil’s advocate. Indulge me.

The three new MVNOs will ride on Airtel’s existing infrastructure and, to a large extent, provide services that are in competition with its own direct offerings.

This may lead to a form of market cannibalisation: a reduction in sales volume or market share of one product due to the introduction of another product.

Cannibalisation, though risky, makes sense in two situations. One is where the perceived contribution or profit from the new product far outweighs the proceeds from the old.

Danger

The second is when the risk of losing market share and/or revenues to a competitor is a near and present danger.

Apple, one of the most innovative companies of the 20th century, is a big success story of cannibalisation gone right. Their philosophy is “better to eat your own than have your own eaten by others”.

In Airtel’s case, therefore, the move could be purely strategic. Whether the strategy behind the move yields proportional returns is something strategists will be keenly watching.

As for subscribers: have your Sim cards on the ready; there might just be a price war coming your way soon.

Ms Ngima is a strategy, finance and governance expert

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