Bharti shakes up Kenyan mobile market

Zain Kenya, now owned by Bharti, has rattled Safaricom with swinging price cuts, triggering unprecedented movement in the Kenyan mobile market. Safaricom has countered this, with its latest move being to slash the cost of SMS for its prepaid customers by as much as 94 per cent. Ultimately, when all the noise calms down, Kenyan consumers will be the winners but Safaricom may have to give up a chunk of its eye-catching profits and market share.

In Kenya, terms and conditions matter

Judging by the announcements of price cuts emanating from Kenya, Bharti — the new owner of Zain Africa — has set its sights on challenging Safaricom, Kenya’s leading player. Buoyed by a regulatory push by the Communications Commission of Kenya (CCK) for operators to reduce interconnection rates, Bharti unleashed the first weapon in its arsenal in August 2010, reducing the price for all voice calls to KES3 per minute with no terms and conditions attached.

The emphasis on terms and conditions is particularly noteworthy. Even when Safaricom tries to counter Zain’s offer, its tariffs are laden with terms and conditions, lending more credence to Zain’s message that its offer is permanent and not a promotion.

The public response has been positive, with queues forming in Zain’s shops. The latest SMS price reductions this week, in anticipation of the CCK’s demand for a lower wholesale data charge by November 2010, are evidence that Safaricom is increasing its counter attacks on Zain.

Ultimately, price competition is hazardous to all market players

While Safaricom has fat margins to fall back on, the cutthroat price reductions are likely to impact all market players — Safaricom, Zain, Orange, and Essar — negatively.

In India, where a similar price war has ensued, Ovum has shown that the profitability of all market players has suffered. There is an even more telling corollary: Vodafone, which owns a 40 per cent controlling stake in Safaricom, took a £2.3 billion impairment charge in India in May 2010, largely due to the effects of the price war.

But the price war is good news for customers, who can now look forward to cheaper calls and SMS messages in Kenya. A price war over data will definitely come soon, and even Safaricom’s highly successful money transfer scheme, M-Pesa, is not out of bounds. In fact, the telecoms price war has already forced down Kenya’s official inflation rate for August 2010.

In a market where telecoms take a chunk of the consumer’s wallet, savings from telecoms can make a difference to overall economic wellbeing. Cheaper prices could also encourage Kenyans to talk more, potentially boosting minutes of use (MoU). Average MoU in Kenya (and much of Africa) are around 50 minutes per month, while in India they are around 300.

For Safaricom, the era of 80 per cent market share looks to be over

In Safaricom the mobile industry has a textbook case study of how to achieve staggering competitive advantage in a market. Safaricom has grown its market share from less than 40 per cent in 2000 to slightly over 80 per cent at the end of June 2010 — a feat that is uncommon in liberalised markets. In doing so, it bulldozed its rivals — especially Zain — into submission, became the largest quoted company in East Africa, and returned billions in earnings to its shareholders.

In contrast, Zain’s operation in Kenya was perilously underperforming and was one of the standout concerns for Zain’s Middle East owners. Its market share has fallen from over 60 per cent in 2000 to 9.4 per cent in 2Q10 — Essar, which only launched services in 4Q08, had a 7.4 per cent share by 2Q10. Between 2000 and 2010, a plethora of ownership changes, with the associated change of names from Kencell to Celtel to Zain, seem to have distracted the business from being able to challenge Safaricom. Bharti now has lots to do to try to reverse nearly a decade of Zain’s poor performance in Kenya.