Focus shifts to small firms in telecoms call rates war

A decision to cut the price of calling on mobiles by 40 per cent has come under renewed focus after the government said the process was undertaken too quickly, without due regard to market forces.

In an interview with Reuters this week, Information PS Bitange Ndemo gave the strongest signals yet that the current price war could dent the ability of smaller operators to survive in the highly competitive sector.

“Government has heavily invested in the telecoms sector. We would not want to remove money to support Telkom Kenya. They are supposed to make business sense,” Dr Ndemo said.
Industry analysts had raised similar fears following the outbreak of lower prices in late August.

The government appears keen to protect its interests in Safaricom and Telkom Kenya, where it owns significant stakes.

Market leader Safaricom commands around 70 per cent of the revenue share in the industry, and analysts saw the price cuts as another means to curb its perceived dominance in the sector.

But Dr Ndemo said he feared the drops would most likely affect Telkom Kenya, the country’s smallest mobile operator in which the government owns a 49 per cent stake.

Telkom Kenya’s proposed listing on the stock exchange has been delayed as the company returned negative profit in the years following its privatisation.

In its results for the first half of this year, Telkom Kenya revenues dipped to Sh5 billion (Euro 48 million) compared to the Sh5.5 billion (Euro 53 million) recorded in the same period last year, mostly due to the already harsh competitive environment.

The company was planning to strengthen its offering in the data segment, where Telkom commands considerable infrastructure, including access to international fibre optic links, an inland fibre network and a country-wide presence.

Although the company - alongside competitors Zain Kenya and Essar Kenya - was granted a reprieve in the cost of its 3G licence when prices dropped to $10 million from $25 million, it has yet to pay for it.

In the past, the government has said it would provide Telkom Kenya with a shareholder loan to launch the service.

Dr Ndemo said calling rates should have fallen proportionally with the uptake of broadband.

“They came as a surprise and cut too deep. They should have taken into consideration the commercial and business interests,” he said.

Dr Ndemo’s statement promises to reopen debate on the controversial price cuts, which were inspired by the CCK after it gazetted new interconnection rates for the industry.

The declaration marks the second public disagreement between the two arms of the government, who appear to be walking a tight-rope as they attempt to appease the heavy investments brought in by the new investors and the interests of the State.

Telkom Kenya and Safaricom have publicly said the current pricing regime in the telecoms sector would hurt the tremendous growth the sector has recorded over the last 10 years.

“These prices are not sustainable. While we expected the prices to drop, we did not expect by such a large margin,” said Michael Joseph, outgoing Safaricom CEO, a sentiment echoed by his Telkom Kenya counterpart, Mickael Ghosssein.

Zain, Kenya’s second-biggest mobile operator which was acquired by India’s Bharti Airtel in June, is largely credited with kick-starting the price war with its move to slash tariffs by 50 per cent last month.

Zain dropped its rates to Sh3 per minute last month across networks, forcing Safaricom to introduce new charges as low as Sh2 per minute.

Telkom Kenya and the market’s smallest player Yu also made drastic cuts.

Dr Ndemo said with interconnection rates at Sh2.21, taxes at 26 per cent, plus salaries and agents fees to be paid, the companies would struggle to make a profit from voice.

“If you have no resources for reinvestment, you impact the quality of the service ... but we can’t tell them, ‘guys, behave’. We are assuming it makes business sense,” he said. Meanwhile, the development highlights a disconnect in the governance of the sector.

In May, the CCK was forced to bench a set of regulations that it proposed to introduce to improve the competitiveness within the telecommunications sector, after the ministry was pressed to revoke the new rules following complaints from industry players.

Dr Ndemo said a revised version of those laws went into effect early this week.

Mr Charles Njoroge, the director-general of the CCK has termed both moves as critical in creating a more competitive landscape.

“We believe the glide level will provide an acceptable balance between the regulatory objective of attaining efficient cost levels as soon as possible while maintaining stability in the business plans for the operators,” he said.

After consulting experts, the government revised the law to create a more transparent process in identifying abuse of dominance.

“Some are going to make noise but we consulted widely. From the government side, we want to see the industry grow and this is the best we’d do for them and the policy will encourage the growth of the sector,” said Dr Ndemo.