High charges loom in planned review of mobile phone tariffs

The full impact of President Kibaki’s recent edict stopping further slashing of mobile phone interconnection charges began to emerge on Thursday after Safaricom announced that it could soon increase its voice call tariffs to cater for increased operational costs.

Mr Bob Collymore, the Safaricom chief executive, said the company — Kenya’s top telecoms operator — was carrying a huge burden in increased network maintenance costs that require a response on the revenue side of the business. (READ: Safaricom stokes Internet price war with rivals)

Mr Collymore said the cost of running diesel-driven base stations rose by 27 per cent since January, especially in areas with no electricity and in western Kenya where frequent power outages mean the stations must run on diesel for up to four hours a day.

“We are experiencing added costs in running our base stations and I will not be surprised if this happens, it is simple economics as the cost of operations have been going up,” replied Mr Collymore when asked whether the operator would increase its call rates.

Though Mr Collymore did not indicate when the increment might take place, telecoms market analysts said Safaricom has been emboldened by the fact that with the Kibaki freeze in interconnection charges none of its rivals has room to cut tariffs in the next couple of years.

Safaricom also appears to be coming to grips with its closest rival Airtel’s strategy after one year of a bruising battle for control of the telecoms market that saw voice call tariffs drop by half in August last year.

Safaricom reckons that the steep increase of diesel prices since January and depreciation of the shilling against major world currencies were among the key drivers of the rising cost of doing business.

The operator’s move is, however, partly being seen as aimed at protecting its profits which declined by a double-digits margin in the financial year that ended in March.

Safaricom reported Sh13.1 billion in net profits in March, a 13.2 per cent drop from Sh15.1 billion the previous year.

Mr Collymore did not disclose the exact margins of the planned tariff increment but said off net tariffs would not go beyond six shillings.

Safaricom charges Sh4 for calls to other networks and Sh3 within its network, meaning the margin of tariffs increment will not be more than Sh2.

Should the company go ahead with the plan, it will become the first operator to ever increase its tariffs in mobile telephony’s 11 year history in Kenya.

By increasing its voice call tariffs, Safaricom will be following in the footsteps of its archrival, Bharti Airtel, which made a similar move in India and Tanzania a couple of months ago reversing the rock bottom tariffs mass market business model it has been pursuing.

Kenya’s call rates came down by more than 50 per cent in August last year after Safaricom’s rival, Airtel, halved its call rates to Sh3 with the drop in Mobile Termination Rates — the fee that telecoms operators charge each other for calls terminated on their rivals network to Sh2.21 from Sh4.42.

Safaricom and Telkom’s Kenya Orange followed suit with similar cuts but loudly protested that the low tariffs were risking future investments in the industry and sought the President’s intervention.

Mr Kibaki ordered a stop to farther cuts in termination charges on May 18, signaling that it will take some time before the operators get new headroom to cut call costs as has happened in the past 10 months.

The industry regulator, the Communications Commission of Kenya’s (CCK) board immediately ratified the President’s directive, meaning that the interconnection charges must remain at current levels in the medium term.

This gave the operators some level of revenue predictability.

The charges were expected to drop to Sh1.44 from the current Sh2.21 beginning next month, a move that was expected to set the stage for a new round of price wars.

The price wars which began in August last year have seen Safaricom’s market share drop to 69.9 per cent from 75.9 per cent last year as rivals Airtel and Orange increased their marketshare to 15.2 per cent from 13.5 per cent and to 8.5 per cent from 4.0 per cent, respectively.

The freeze in termination charges effectively meant a victory for Safaricom and Telkom Kenya – the two operators who opposed further decline in termination charges citing its negative impact on the sector’s profitability and risk of job losses.

It also sent Airtel, the low-cost mass market operator that entered Kenya last year and has been pushing for a further glide in the charges, back to the drawing back for a new strategy.

Airtel has maintained its push for further cuts in interconnection charges saying overturning a process that was transparently established with the involvement of all stakeholders was unprocedural and harmful to consumer interests.

The Indian firm also insists that a change in the execution of the MTR plan poses serious risk to its business whose entire operating strategy was hinged on its successful implementation.

Rene Meza, the former Airtel managing director who initiated the price wars, quit his job on Monday for a similar position in Vodacom Tanazania that is majority owned by Vodafone UK.

Vodafone has a 40 per cent stake in Safaricom.

Since they began last year, the price wars have not only divided the operators but also government agencies.

The CCK has for instance been pushing for new cuts in interconnection charges against the wish of top Information ministry officials such as Permanent Secretary Bitange Ndemo who insists that low tariffs model is not sustainable.

It remains to been seen how the market will react to Kenya’s very first mobile phone tariffs increments but Safaricom may derive confidence in the fact that recent moves such as the rollout of number portability have only marginally changed the marketshare landscape.

The decline in call costs, though good for consumers, portends a deep cut in voice call and text messaging revenues and ultimately a slowdown in sector profitability.