Price wars signal difficult times for companies

Price wars by mobile phone firms will drain the sector’s income and affect future reinvestments in new products and services, analysts have said.

The quick gains that the telcos are realising from consumers as subscribers shift to less expensive service providers is unlikely to sustain the sector.

In the worst case scenario, analysts said, the price wars will degenerate into anti-competition strategies when companies undercut each other in pricing voice and data, triggering cost- cutting measures that could see staff cuts in some cases.

The consequences of price undercutting are more evident in Kenya’s insurance industry that has undermined the industry’s revenue growth and survival of some companies.

Mr Isaac Ng’aru, an insurance industry analyst with Ng’aru and Associates said while insurance and telecoms are quite different sectors, price wars would mean they share common consequences of reduced profit margins and increase their operating costs as their revenues dwindle.

The operating costs will remain the same or even higher because of high advertising spend associated with price wars.

“If telecoms want to maintain their profits before the price wars, they will turn to cost-cutting measures like staff rationalisation. I hope that this will not happen in Kenya,” said Mr Ng’aru.

Zain, which was acquired by Bharti Airtel, triggered the price wars by lowering its calling rates by 50 per cent last month. Other companies have since followed.

With calling rates averaging three shillings across networks and with companies paying interconnection fees of Sh2.21 and taxes of 26 per cent of the remainder, the price cut has all the ingredients of price undercutting, especially when other operation costs like salaries are factored in.

Although Kenya is estimated to have 20 million active lines, analysts say the market still requires reinvestments but pricing battles will stunt this opportunity.

Communications Ministry PS Bitange Ndemo said the current price wars may end up affecting the “commercial and business interests,” of the telecoms, with major casualties being profits and higher operating costs.

Mr Ndemo said while technically the Government cannot intervene in a liberalised market, it will consider doing so if the price undercutting reaches crisis level as happened in Sri Lanka where Bharti Airtel is also a player.

“The Government will always be concerned about what is happening in the sector especially where operators may not be able to re-invest in new technologies and expansion to rural areas,” said Mr Ndemo.

Concern in government circles is about the possibility of Safaricom — the major target of the current price war — having its revenues hard hit and hence reducing its ability to be the anchor of mobile telephone innovation and reinvestment in Kenya.

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