What exits and acquisitions in telecoms sector mean for Kenya’s 30.5m subscribers

By Jevans Nyabiage and Emmanuel Were

Kenya: In the Bible, the number seven is associated with completion and perfection. In the telecoms sector, the number appears to be pretty lucky, too. In the seventh year of M-Pesa, Safaricom, Kenya’s largest telecom by market share and profitability, has seen its rivals fall by the wayside as their price war strategy flops.

Essar Telecom, which trades under the yuMobile brand in Kenya, is breathing its last in the country, while Orange Kenya struggles to stay afloat.

Both yuMobile and Orange Kenya are suffering the effects of pushing calling rates to rock bottom to win subscribers, a strategy that has left them with massive losses.

The demise of the two is set to return Kenya’s telecom market to a duopoly controlled by Safaricom and Airtel, something that might not sit well with many consumers and even regulators.

False dawn

The question now becomes: How will the dominance of Safaricom and Airtel change the telecoms market in Kenya?

The other nagging question for the regulator is: If Orange Kenya also decides to throw in the towel, should it offer incentives for the likes of South Africa’s MTN, America’s AT&T or United Arab Emirates’ Etisalat to enter the Kenyan market and offer stiff competition.

What is happening in the Kenyan telecoms market is set to become a case study around the world. It is also of such significance that it will likely be taught to MBA students and in business schools worldwide.

After six years of what was the false dawn of a competitive telecoms market, Darwin’s theory of survival of the fittest is coming to fruition. 

The fittest of them all, Safaricom, is enjoying one of its best years.

It is on course to deliver record full year profits, it is sitting on a lot of cash, and that share price that had been much maligned has hit record highs.

But will Safaricom sit back and watch the cash tills keep ringing? There is no likelihood of that happening because Safaricom is Vodafone’s jewel in the crown. And so the telco will be pushed to innovate around M-Pesa and make strategic moves in the data segment.

This is because revenues and margins in the voice sector will sooner or later be cannibalised by the free services popping up all over the Internet.

The next in line, Airtel, appears to have had some breathing space with the imminent exit of yuMobile. What needs to be considered in great length and depth is what Airtel will do next.

Bharti Airtel has made a move for the 2.7 million yuMobile subscribers. On the face of it, it looks like a good deal because it increases the number of subscribers Airtel has to about eight million. 

Deeper analysis

“But for Airtel to acquire another 2.7 million subscribers overnight means its network will be even more congested as the new subscribers get transferred to it — bad move,” said Mr Peter Wanyonyi, a telecoms analyst.

And if one does a deeper analysis, it appears Airtel could shoot itself in the foot by acquiring customers from yuMobile, which has the lowest Average Revenue Per User (ARPU).

The ARPU is a measure of how much money on average a telecom can get from its users.

The amount every Safaricom customer spent during the six months to September 2013 was Sh547, up 11 per cent from Sh490 over a similar period the previous year.

Airtel on the other and enjoys one of the highest ARPU from its post-paid customers, who happen to be very loyal to it. An industry expert estimated Airtel’s ARPU for its post-paid customers at about Sh1,000.

So by bringing in yuMobile customers, Airtel will inevitably dilute its ARPU.

But why does this revenue matter? Well, if Airtel can sustain a higher ARPU, it means it is slowly climbing out of the losses it has been making, and will soon post a profit in the Kenyan market.

This will be good news back in India where the Bharti Airtel headquarters are located. The company’s officials back in India might pull another coup if they appoint a local CEO to manage the Kenyan operations. This will be another attempt at winning the hearts and minds of Kenyans.

And with the reduced competition in the market, there is something Airtel can do to increase profitability.

Mobile termination rates (MTR) are going to be lowered in July this year to Sh0.99 from the current Sh1.15.

If the MTR is lowered and yuMobile and Orange have exited the market, then Airtel will be well positioned to increase its calling rates across networks — that is, calls from Airtel to  Safaricom.

This means it will be in a position to earn more money and will lock in subscribers.

The question is whether Airtel is ready to pull such a bold move.

This naturally leads to the question of whom between Airtel and Safaricom will suffer most with the entry of another competitor, whether it is MTN, Etisalat or possibly AT&T.

Some analysts are of the opinion that Airtel will find itself in a precarious position since it will get another competitor on its back.

This is especially so if MTN comes in. MTN is known for marketing using the voices of locals, something that has won it clients across Africa.

This is something that Airtel has not done very well, even with its “One Africa” marketing campaign.

Etisalat — which is already involved locally in The East African Marine System (TEAMS) project, the undersea cable — could be the biggest threat to Safaricom because of its strength in data.

A possibility for MTN and Etisalat would be to buy Orange Kenya’s assets, but the due diligence required might be too complicated to be attractive.

INTERESTING TIMES

And while Orange Kenya has kept under wraps plans to exit the Kenyan market, the third-largest mobile operator in subscriber numbers, yuMobile, has officially thrown in the towel after years of bleeding billions of shillings in losses.

“These are interesting times in the Kenyan telecom market. I have consistently stated that Kenya is ideally a two-player telecom market, lacking the size required to accommodate four players,” said Mr Wanyonyi.

Essar has already applied to the Communications Commission of Kenya seeking to sell its infrastructure and customers to rivals Safaricom and Airtel, respectively.

Safaricom has since issued a cautionary statement relating to the acquisition of Essar’s assets even as the deal awaits regulatory approval.

Once approved, Safaricom will buy yuMobile’s infrastructure and retain about 130 employees in the technical department, while Airtel acquires the 2.7 million subscribers by taking over yuMobile’s number prefix.

Industry players, analysts and consumers are watching the unfolding reports keenly, and what the likely impact on the telecoms business will be.

Safaricom is said to be the biggest beneficiary in the yu deal.

Mr Danson Njue, a research analyst at Informa Telecoms & Media, says by acquiring yuMobile’s infrastructure (which also includes the spectrum), Safaricom will have the upper hand in improving the quality of its network, as well as boosting its efforts to increase market share in the data market.

“It will also be strategically placed to massively roll-out its 4G LTE network to provide high-speed mobile data services to its users, something which is part of its priorities this year,” said Mr Njue.

In the past year, Safaricom has made an investment of Sh10.5 billion ($115 million) under the recent umbrella project titled Best Network in Kenya Programme.

The programme seeks to grow 2G and 3G capacity, and roll out fibre in Nairobi.

The acquisition will help Safaricom grow its 2G network expansion in rural areas, boosting its current network expansion drive in the country.

“Safaricom recently failed to meet quality of service (voice quality) targets set by the CCK, and the acquisition of yuMobile’s infrastructure assets is expected to help it improve network QoS performance.

“Achieving CCK’s QoS benchmarks will be a key development as this is tied to renewal of Safaricom’s operator licence in June 2014,” telecoms research firm International Data Corporation (IDC) said in a note.

Safaricom’s bid to acquire yuMobile assets is strategic — most importantly to lock out heavily capitalised competitors such as MTN or Viettel, the Vietnamese telecom.

Also, the mobile operator would want to protect itself from the likes of Equity Bank and Nakumatt that have applied for mobile telecommunication services.

In essence, if Equity Bank and Nakumatt, the retail chain, get the licence to provide mobile services, they would still need to lease the infrastructure from Safaricom and other telecoms.

And in Airtel Kenya’s case, the telco has been relentless in its fight for market share since it came into Kenya.

In recent years, its parent company has aggressively pursued the African market to grow subscriber numbers and increase geographical presence. This would be its third acquisition after its purchase of Abu Dhabi-based Warid Telecom’s operations in Uganda and Congo.

IDC estimates that Airtel’s acquisition of yuMobile’s subscribers will see its market share jump to over 26 per cent from the present 17.6 per cent.

Although the deal represents continued growth in market share for Airtel, IDC cautions that it is not guaranteed that all the subscribers will cross over.

Strategy jackpot

They also warn that the new subscribers could be counterproductive for Airtel.

Yu’s growth in subscriber numbers was driven by reduced voice and SMS rates, which led to a percentage of users purchasing the operator’s line as a secondary one, while maintaining their primary line (either Safaricom, Airtel or Orange) for other value-added services such as mobile money.

IDC says a majority of these subscribers have contributed to a lower ARPU for yuMobile compared to other operators.

“IDC does not expect this acquisition to result in a huge jump in profits for Airtel. Airtel needs to create a stronger business unit offering IT services to open up new revenue streams and take advantage of Kenya’s growing acumen as a destination for multinational corporations.”

Safaricom, on the other hand, has hit the jackpot.

The telco is looking to expand its network and get more of its customers to consume 3G services, giving it more data revenue.

Acquiring more infrastructure gives Safaricom the ability to offload a lot of its traffic in congested areas to the yu network, creating more capacity.

More importantly, Wanyonyi says, Safaricom has also obtained the radio frequencies that yuMobile had been allocated. 

“This is a massive coup,” he added. “The radio spectrum is a limited resource, and Safaricom is now able to improve its services by making use of the yuMobile frequencies as they like — they could refarm the frequencies for 4G deployment or for expanding 3G network. Either way, Safaricom is a big winner here, and the acquisition of the yu network was a very clever decision.”

Yu’s exit also puts immense pressure on Orange. Ordinarily, a folding operator would see its subscribers cross over to other operators more or less in accordance with prevailing market share.

In this case, however, the subscribers are going to Airtel, which means Orange remains as it was.

Orange has struggled against Safaricom and Airtel, but has not been able to make much headway.

“I do not see any future for Orange in Kenya, and I firmly believe that in a couple weeks or a month at the most, Orange will look to make plans to exit the Kenyan market,” Wanyonyi said.

There are exactly zero revenues to be had in SMS and multi-media messaging services (MMS) — thanks to mobile applications like Whatsapp and Viber, and Facebook messaging — and voice revenues, already tight, are expected to take a further dive when Whatsapp introduces free voice calling in April.

Bleak future for Orange

“Orange, without a serious value added service (VAS) to rival Safaricom, therefore, looks at a bleak future. The most logical, and virtually unavoidable, thing to do is to sell and leave,” Wanyonyi said.

For Telkom Kenya, IDC says the operator, which only commands 7 per cent of market share, is going to face an uphill battle competing with Safaricom and Airtel Kenya.

With the saturated voice market, dipping revenues in SMS and Safaricom’s dominance in mobile money services, IDC sees broadband services such as Internet and mobile data as a key frontier for Telkom Kenya’s survival.

IDC says the operator should strategically position itself and venture into the IT services space and other emerging technologies, especially in the public sector.

The telco’s ties to the Government could be particularly beneficial as State departments and ministries make headway in e-government.

Njue adds that Orange boasts better network quality, and has the upper hand in terms of infrastructure. However, it has been struggling financially, so its expansion plans might be affected.

“It needs to invest in its operations to survive in the market. For now, the market will be dominated by the Big Two: Airtel and Safaricom.”

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