Zain shakes telecoms market with rock-bottom call tariffs

Safaricom charges Sh12 per minute for calls heading to rival’s network.

Orange charges Sh8 and YU (Sh6). 

While the rivals are still struggling with losses, Safaricom has been posting double digit growth in profits helped by its growing subscriber base.

Safaricom posted a 36 per cent increase in net profits to Sh20.9 billion for the year ended March 2010 on revenues of Sh83.9 billion.

Telkom Kenya generated Sh11 billion in revenues last year, while Zain returned $118 million (then Sh8.8 billion) for the nine months to September 2009.

Analysts reckon that the tariff cuts look set to slow down the profit momentum on reduced ARPU.

“The industry is poised for lower tariff and this will reduce the earnings momentum of the voice business,” said Erick Musau, an analyst at African Alliance. Safaricom’s ARPU has dropped from Sh816 in 2006 to Sh459 in 2010.

He said that Zain is betting on volumes to drive revenues and gain market share, warning that the model would help Zain gain market share but not profits in the short term.

The low-tariff, mass-market model has been the preferred model for India’s Bharti—which bought Zain Africa’s operation for $10 billion in June.

“It is a positive step, but Zain must rollout value addition services to be able to compete with Safaricom effectively,” added Mr Musau.

“The last time Zain cut rates, Safaricom profits reduced but the rest of players’ moved into losses.”

In 2008, Zain cut its cross network tariff to Sh8 from Sh12—which saw the company sink deeper into the loss-making territory despite growing the number of its subscribers by more than a million.

It withdrew the rates months later.

“With the business model we have adopted and the right mind set of the current partners I don’t see why we should not be able to sustain this tariff” said Mr Rene “It is going to be long and tough but our partners are aware of this.”