Tariff wars cause major drop in mobile phone airtime sales

Telecoms dealers and agents have become the silent victims of the vicious fight for mobile phone subscribers that have halved tariffs in the key voice segment of the business – causing ripples across the industry.

Airtime traders say there has been sharp drop in volumes since Zain fired the first low tariffs salvo forcing other operators to follow suit.

The low tariffs have significantly extended the time that consumers take before they are back to the shop for a top up – cutting trading volumes by large margins.

“Our customers are not topping up as frequently as they used to do because any amount of airtime they buy now lasts much longer,” said Alloys Muchama, an airtime trader at Nairobi’s Kawangware estate who revealed that his sales volumes have halved.

Mr Muchama represents the group of entrepreneurs who are silently bearing the pain of mobile tariff wars, away from the glitzy advertisements and aggressive promotions that operators have been running since the battle for subscribers began three weeks ago.

Ordinarily, the telecoms operators may have expected consumers to make longer calls or increase their spending on airtime with the tariff cuts but dealers said there have been no signs of increased spending on the shop floors.

The cost of voice calls fell by 50 per cent last month to Sh3 per minute and consumers can now send short text messages at a rock-bottom price of Sh1 more than halving each subscriber’s monthly budget for airtime, according to initial findings by research firm Consumer Insight.

Analysts believe the industry is undergoing a fundamental change that is shaping the way mobile telecoms businesses will operate in the next five years.

Top in the list of changes is the shift of focus away from the voice market to new areas such as data, value added services as well as open up new business fronts in infrastructure and new media.

“The operators instinctively know that a “race to the bottom” in pricing ultimately destroys billions in shareholder value,” said Tim McGinnis, an industry analyst. “Kenya’s telecoms market is a high wire act that requires a balancing between allowing acceptable levels of return on investment to shareholders and offering consumers value for money.”

Regulatory pressure

Managing shareholder and consumer expectations, and navigating the regulatory pressure on the business have become the foremost challenges for telecoms sector executives, who are looking for signals on how best to confront the realities of a market where profits are expected to fall by a further 40 per cent by 2015.

This is the same position that several European mobile operators found themselves in 2008, when falling revenues per user (ARPU) and the advent of saturation in call prices pushed voice revenues to all-time lows.

Like their European counterparts, Kenya’s mobile operators are looking for new revenue centres that will help cushion their operations from the plummeting of voice earnings that have been the industry’s mainstay in the last 10 years.

“Rather than fighting over a dwindling pool of the increasingly low-spending mobile subscribers, the operators are taking to convergence to increase their market shares and protect their ARPUs,” said Yejide Onabule, an analyst at Pyramid Research.

Most analysts believe that ARPU decline is likely to flatten out as data revenue replaces voice, pointing to indicators from other markets that have gone through the similar stages of maturation.

Data traffic

“Mobile data traffic has exploded in the past two years, and is expected to expand at a compounded annual growth rate (CAGR) of over 40 per cent between 2009 and 2015,” said Bhavya Khanna of ABI Research. “Operators can cash in on this demand by enlarging their mobile broadband coverage, thus increasing their user-base.”

Mr Khanna believes the mobile operators have been aware of the looming changes and have reordered their operations accordingly, with many refocusing their energies on new revenue streams such as data.

It is these dynamics that have pushed market leader Safaricom to cement its position in the mobile data arena with trials of 4G services and key purchases of small data companies for access to frequencies and infrastructure to back its assault on the data market.

Safaricom CEO Michael Joseph has made no secret his belief that the future of his company lies in data services.

The company is already reaping the gains of being an early internet adopter in increased revenues from data that rose by 72 per cent in the last financial year, translating to over Sh3 billion in revenues.

The firm has also deepened its presence in the devices market with mass sales of mobile handsets, laptops and computer accessories that raked in Sh3.6 billion last year.

“Data should cushion us from some of the reductions in income from voice. This is an area where we intend to leverage our lead in the market and the intention is to manage as much of the chain as possible,” said Mr Joseph.

Pyramid Research believes that Safaricom will rely on bundled services, including broadband, video conferencing and voice in a single package to compete in the future.

That should help boost its ARPUS and market share among high-value subscribers.

Telkom Kenya with the largest share of the fixed line internet market is expected to leverage on its extensive fibre network and on lucrative government contracts to steer past the debilitating effect of the price wars.

Bharti, which plans to spend Sh25 billion in next 18 months to get more subscribers on its network, is plotting to use its 3G licence to capture a share of the growing data market, even as it changes its business model to allow for further price cuts on voice.

The company is also hoping to deepen its push to underserved rural customers by sharing infrastructure to lower operational costs for lower voice tariffs.

“We have decided to hive-off our towers into a separate company that will be consolidated into an Africa tower company in the next few quarters,” said Manoj Kholi, the Bharti Airtel CEO at an investor briefing. “We have initiated some discussions at country level for collaboration in fibre optic and tower sharing. That should help us go to small towns as well as villages with well priced services,” he said.

Mr Kholi also indicated that Bharti would consider entering the TV market that in his view remains hugely unexploited.

The price wars began in earnest three weeks ago after the Communications Commission of Kenya (CCK) announced new interconnection rates leaving the operators with enough headroom to lower voice tariffs.

The commission has imposed a mandatory 50 per cent reduction in mobile termination rates from Sh4.42 per minute to Sh2.21 per minute.

This will progressively decline by 35 per cent, 20 per cent and 15 per cent annually in 2011, 2012 and 2013 respectively before attainment of fully cost-oriented operations in 2014.

Rate cuts

The rate cuts have piled heavy pressure on voice, which accounts for up to 80 per cent of some mobile operators’ revenues, taking the players back to the drawing board.

Increased regulation remains a significant consideration for mobile firms in coming months but the market regulator believes it is in the interest of the entire market.

“Improvement of the competitive landscape arising from these interventions will generate significant market efficiency dividends for the entire industry, said Charles Njoroge, Director-General of CCK.

Apart from the threat of a new a set of regulations aimed at curbing dominance in the sector, operators will also have to contend with weakened subscriber bases following the conclusion of the recent SIM registration effort.

The CCK’s announcement that the country will introduce mobile number portability (MNP) by December 2010, also presents a new problem as it will enable subscribers to change their service provider without losing their mobile number.