Kenya’s top telecoms firm Safaricom on Tuesday followed its rivals down the low tariffs path chopping off up to five shillings from every minute call aiming to claw back lost ground in the war for subscribers that began last week after Zain introduced rock-bottom prices.
In the next 30 days, Safaricom’s pre-paid subscribers who top up with high denomination scratch cards of between Sh250 and Sh1000 will make calls at a price of Sh2 per minute on network and Sh3 to other networks going head to head with Zain.
The high net-worth postpaid customers will make calls at a price of Sh3 per minute across all networks during the one month offer period.
These moves are expected to give the Safaricom management some space to fine-tune strategy as Kenya’s most profitable firm battles with a host of regulatory and competition threats sparked by the regulator’s revision of cross-network charges last week and the introduction of new rules on competition.
But the big question in investors’ mind is whether the country’s only listed mobile telecoms firm will ward off the current threat and keep its big profits machine rolling in the long term.
Since Zain threw the tariffs salvo on Wednesday last week, Safaricom’s counter at the Nairobi Stock Exchange has been a bee-hive of activity that raised the volume of shares traded in four days up by 335 per cent to 113 million compared to only 26 million in the four days before the tariff wars began.
Safaricom’s share price also fell by a margin of 16 per cent to Sh5.20 on Monday from a high of Sh5.95 on the day before Zain revised its tariffs as investors weighed implications of the changes on Safaricom.
As expected, Tuesday’s rollout of new tariffs appear to have calmed investors’ nerves stemming the slide and leaving the share price slightly firmer at Sh5.25.
Data is not yet out but Safaricom’s move should also have helped it stem the tide of subscriber purchase of Zain’s SIM cards since Kenya’s second largest operator introduced the new tariffs.
Zain’s decision to head for the rock bottom was meant to box Safaricom into a difficult corner.
If it did nothing about the rival’s offer of Sh3 per minute for voice calls across all networks and one shilling for text messages, it would have to reckon with the danger of mass migration by subscribers looking for better deals elsewhere.
On the other hand if it followed suit and went for the rock bottom it faces the possibility of losing a large fraction of revenue from the voice business -- its most lucrative so far that accounts for 70 per cent of total revenues.
Safaricom has, for the time being, chosen to sit on the fence, keeping its most reliable and high spending post paid clients at par with Zain while easing the call cost burden on the more unpredictable pre-paid subscribers, who will call within the network at Sh1 lower.
It has however become clear that the nervousness caused by the tariff wars has not been confined to shareholders and subscribers but also run through Safaricom’s mammoth agency network – where fear of lower patronage in the event of mass subscriber migration to Zain is rising.
It is too early to see how all this will turn out. What is not in doubt is the fact that all these stakeholders will be watching Safaricom’s every single step in the coming days to see whether it has the arsenal to fight its biggest and most potent tariff war in 10 years.
Zain is said to have gained more than half a million new subscribers by Monday although its managing director Rene Meza could not confirm this.
“We have not done a countrywide tally on the number of SIM cards that we have sold. However, from the queues at our shops, the public response has been very positive,” he said.
Foreign investors responded differently to the tariff wars initially going on a selling spree as the share price plummeted before shifting to an aggressive buying mode.
On Tuesday, foreigners bought Sh64.189 million worth of Safaricom shares and sold (Sh4.569 million) apparently convinced that there was too much smoke but very little light on what is in store for the mobile phone firm.
“Foreigners tend to buy when retail investors have panicked and are getting out of a counter,” said Isaac Njuguna, investment manager at Zimele Asset Management. “They seem to behave differently from the locals. They initially might have panicked but may have now analysed the situation further.”
On Friday and Monday, foreigners sold about Sh160 million worth of shares but also bought the competitively priced shares worth Sh142 million as news of the reduction in tariffs sank in.
By Tuesday, the trend had changed to buying again as bargains came in with heavy retail shareholder sales.
Mr Njuguna said that foreign investors have often proved to be right when it comes to investments in the local market – reacting more to solid fundamentals than to temporary sentiments or changes.
“To wrestle 80 per cent of the market from a competitor cannot come easy. There has to be more than a price reduction and it cannot happen overnight.”
James Wangunyu, the managing director of Standard Investment Bank, termed the share price reduction ‘not massive’. “The impact is not big but we can see that the market is nervous,” he said.
Should the price war persist to the point that Safaricom is unable to reverse its promotional offer, then chances are high that barring a massive growth in a new business segment such as data, the company’s profits machine will come under heavy stress and slow down its dividend policy.
The highest dividend Safaricom has so far paid is 10 cents a share.
Most analysts however believe that Safaricom’s position gives it an upper hand in any marketshare war, including ability to stand short-term losses.
With a profit machine used to billions in earnings before interest, income tax, depreciation and amortisation (EBITDA) of Sh36.6 billion for financial year 2009/10, a 31-per cent rise from the previous year, and market capitalisation of Sh250 billion, the company remains the largest in the eastern African region.
But with India’s Bharti Airtel, the new owners of Zain, having announced that intends to invest more Sh20 billion in the business, there can be no underestimating the threat that Safaricom faces.
Safaricom has about 19,500 agents for its M-Pesa product and is already on the 3G network.
Airtel also plans to spend heavily on its data network to introduce the 3G network besides boosting other its voice network capabilities.
This should increase its ability to compete with Safaricom head to head in key growth areas of money transfers and broadband internet.
The tariffs wars are also likely to have a massive impact on Safaricom’s agents if the migration does not stop, analysts said but added that there is a possibility of arresting the new developments if Safaricom reacts with a permanent rather than a promotional offer.