Kenya: At a time when Safaricom’s shares are trading at an all-time high, the push by Airtel Kenya to break up the most valuable company in the region could not have come at a more interesting period.
Safaricom’s shares last week touched Sh16, the highest price they have hit since the telecom went public in 2008.
And with just under a month to go before Safaricom’s full year ends on March 31, 2015, the firm is on course to report record profits, going by the six-month results it announced in November last year.
Safaricom announced a profit after tax of Sh14.7 billion in the six months between April 2014 and September 2014, breaking its own half-year record of Sh11.2 billion set the previous year.
To put this in perspective, the telco earned nearly Sh82 million in profit every single day within those six months. No other company in the region comes close to doing this.
Renewed push
So because of Safaricom’s super profits and control of 80 per cent of market share by revenue, Airtel Kenya, which comes second in terms of market share, has renewed its push to have Safaricom declared dominant.
Airtel wants the regulator, Communications Authority of Kenya (CA), to step in and act before Safaricom gets even bigger.
One of the things that Airtel is pushing for is to have Safaricom charge subscribers the same amount for calls made from one Safaricom line to another (on-net calls) as for calls made from a Safaricom line to another network (off-net calls).
Why is this so important?
In 2011 when other telecoms — Airtel Kenya, Orange and the now defunct yuMobile — were slashing their call rates to win over subscribers, Safaricom hiked its prices by 33 per cent to Sh4 per minute from Sh3 per minute.
Airtel Kenya argues that because of its dominance — Safaricom controls about 70 per cent of the voice market — the telco can easily raise the cost of on-net calls without fear of losing subscribers to other networks.
And Safaricom makes a handsome profit from calls within its network because it does not have to pay out termination fees to Airtel or Orange.
Therefore, while calls to other networks are set to reduce drastically because of a drop in the Mobile Termination Rate (MTR) — the amount paid to terminate calls on the other operator’s network — players like Airtel and Orange will get less revenue from Safaricom.
Subsequently, Airtel argues that Safaricom should be forced to charge its subscribers the same for calls made within its network as to other networks.
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Making money
This would seem like entrapment for Safaricom.
One of the best and easiest ways to make money in the telecoms business is to increase the cost of on-net calls. If Safaricom raises its charges for calls made by subscribers within its network, it would have to do the same for off-net calls.
Airtel Kenya and Orange Kenya would be happy with higher off-net calls because it would mean they get more income from termination rates.
However, Airtel Kenya might need to be careful what it wishes for.
Because of its hold on the voice market, and also in money transfer services through its platform M-Pesa, Safaricom might decide to pull a fast one on its competitors by lowering its on-net calls, say, from the current Sh4 to as low as Sh2.
If Airtel argues that on-net calls should be the same as off-net calls, then this might end up working in favour of Safaricom.
Point of attack
Perhaps this informs Airtel’s push for Safaricom to be split into smaller companies. What Airtel has not clearly explained is the how this break up would occur.
Of course the easiest point of attack would be for Safaricom to be pushed to open up its money transfer business M-Pesa, which has acted as a customer retention tool.
“We are saying to the regulator and the Government and industry players that they should work together and solve the dominance issue because today, what happens if the M-Pesa platform crashes? What does it mean for the economy and the consumers?” asked Adil El Youssefi, Airtel Kenya’s CEO.
But what has watered down Airtel’s argument to have M-Pesa separated from Safaricom is how to go about doing so.
Would it be prudent to have M-Pesa run as a completely separate entity that Airtel Kenya and Orange Kenya are allowed to share, including the platform’s agents and servers?
Would Safaricom be willing to let go of one of its greatest innovations?
Two weeks ago, Safaricom CEO Bob Collymore put forth a strong defence.
“If you start to slice the legs off this particular company, we’ll have to pull back on that type of investment,” he said in an interview with Bloomberg.
“We’re all up for going through the process, defining the areas that we may or may not be dominant in, defining what the abuse is, and defining what the remedies are. Not simply standing and calling people names.”
Mr Collymore said his firm would reduce its planned Sh36.4 billion investment in Kenya this year if regulators imposed penalties to limit its market dominance.
It seems Airtel’s actions have touched a raw nerve.
Interestingly, the rivalry between these two firms goes way back.
In 2000, Kencell got a headstart on Safaricom and launched mobile services six months earlier. It then took Safaricom six years to firmly win market leadership.
Analysts Business Beat spoke to said the strategies the two operators employed made all the difference.
Top-end market
Stability in management was a key contributor. While Safaricom has had two CEOs in its 15-year existence, Airtel has had nine, each coming in from very different operations with different strategies.
When starting at the turn of the century, Airtel’s predecessor (Kencell) focused on the top end of the market and it was the larger operator, generating good revenue at good profitability.
Kencell chose a focused differentiation strategy, where it targeted corporates with high quality, highly priced post-paid services.
Safaricom was the “underdog”. It took a risky route that had not been tested in the market: it aligned its systems and branding to reach out to the bottom millions.
The results were that Kencell grew faster than Safaricom due to its high quality voice and data network, as Safaricom experienced teething problems due to its association with the then struggling Telkom Kenya. The Safaricom network was also prone to breakdowns.
Kencell segmented its market, targeting the rich. To them then, the mobile phone and calling were meant for rich business people and executives in companies.
It employed per-minute billing, a big undoing that its rival Safaricom capitalised on and that eventually catapulted it to market leader.
In 2002, Safaricom began rebranding itself as a “cheap” network. It began a billing system based on seconds rather than its rival’s minutes. Taking advantage of Kenyans’ “peculiar” calling habits, where the average phone call lasts only a few seconds, Safaricom found a comfort zone.
As one Safaricom advert put it, “Why pay for a whole minute when you can pay for only the seconds you talk?”
In a country where people are used to ‘beeping’, per-minute billing was not going to appeal to the masses.
What turned off many people was that when you beeped someone, you were billed as having used up a minute, even if the person on the other end did not pick up. Although Kencell later changed its tariffs to per-second billing, the damage had been done.
Also, the high turnover in the company’s boardroom has led to the company shifting from chasing the high-value customer on post-paid services to offering the lowest rates in the market for the mass pre-paid market.
And then in 2005, Vivendi, the French co-owner of Kencell, sold its 40 per cent stake in Kencell to Celtel International, the latter adopted a pan-African marketing strategy.
In the meantime, Safaricom localised advertisements that helped draw in millions of customers.
Celtel later rebranded to Zain Kenya and now Airtel due to a change in shareholding. Safaricom, meanwhile, became the market leader.
Kencell tried to compete on price by significantly lowering its prices — it reasoned that the revenue generated from far greater use of voice calls would surpass revenue sacrificed in lower costs per minute of a call.
The market proved it wrong and its revenues declined.
Safaricom then began moving more aggressively to expand its base, and also moved into data services and deployment of various technologies.
But the game changer was the introduction of M-Pesa.
“The introduction of M-Pesa proved to be a real coup for Safaricom,” said Dobek Pater, the managing director of Africa Analysis, an ICT sector consultancy firm that tracks telecoms in the continent.
“If you were a Safaricom subscriber, you could access an increasingly broader payment ecosystem. M-Pesa is both an attraction for new subscribers and a very good retention product.”
Today, the big question remains: should Safaricom be declared dominant and ultimately split?
This, Mr Pater said, depends on the outlook on how competition should unfold in this market.
“Once an operator grows to the size of Safaricom, with more than 60 per cent market share, it is very difficult to compete against an entity like that.”
CA Director General Francis Wangusi has, however, said Safaricom does not appear to be abusing its dominant position.
Further, due to the growing diversification of the Kenyan telco market in terms of service providers and operators, with the growth of many smaller alternatives, the firm’s share is down to around 60 per cent in some segments of the market.
For instance, at one point, Safaricom held more than 80 per cent of the subscriber market share. This has since dropped to below 70 per cent, a pointer that other operators could be eating into its share.
“Regulation will most likely need to be used to strengthen competition in the market,” Pater said.
FIRST MOVER
Peter Wanyonyi, a telecoms analyst, added that what differentiates Safaricom and makes it market dominant is a non-core service: M-Pesa.
“So dominant is M-Pesa (as the first mover in the market) that, of course, virtually every mobile subscriber in Kenya has an M-Pesa account,” he said.
“This, in turn, assures Safaricom of customers and, therefore, revenues.”
Job Ndege, the managing director of Protocol Solutions, a communications solutions provider, said: “Logically, M-Pesa can be an independent service from the voice and data services, and the network infrastructure company can be different from the retail or voice and data services.”
However, according to Mr Ndege, CA rules have mechanisms that can be invoked when a player becomes dominant, but a break up is not one of them.
The options include rival players sharing infrastructure and non-discrimination in termination rates and service quality.
Pater said Safaricom’s market position should not see it “punished” for being successful.
“This goes against the grain and logic of free market competition. Safaricom decided to take certain risks, commit investment, be innovative, and through its staff, work very hard to achieve its market position. It obviously paid off. Nothing prevented its competitors from doing the same,” he added.
Safaricom has chalked up its success to good strategy and prudent management.
“Something that I think should concern Kenyans is this apparent arbitrary declaration of dominance, and this apparent attempt to reduce the size of what is an African champion,” Collymore said.
“It’s the prudent management of the company that brings the returns that we have been bringing back to our shareholders, and using to invest in this company. This year, we will have spent Sh36 billion.”
Innovation machine
The Safaricom case is interesting because its dominance is not due to its being a monopoly.
“Dominance in itself is not a crime,” Collymore told Bloomberg.
“Why people keep assuming that, because you’re dominant, you’re committing a crime, I don’t know.”
Muriuki Mureithi, the founder of Summit Strategies, a telecoms consulting firm based in Nairobi, added that Safaricom’s innovation machine worked very well for it.
“All its innovations, such as very low denominations of airtime, Okoa Jahazi, M-Pesa, roadside advertising, worked. Safaricom has invested heavily and consistently and this has paid off. This is now clearly a huge market as demonstrated in the banking sector by Equity,” he said.
“For Airtel, the change of ownership, leadership and branding did not give customers confidence, and that is the challenge they face, despite lower tariffs.”