Tariff wars eat into telecom revenuesThursday February 03 2011
A near halving of call costs in the third quarter of last year caused a steep decline in consumer spending on telecommunication, pointing to a looming slowdown of profits growth across the sector, official data from the market regulator indicates.
The Communications Commission of Kenya (CCK) says the drop in voice call tariffs in mid August helped grow the subscriber base and double the time consumers are spending on calls, but made no impact on the average revenue per user (ARPU), a key determinant of the telecoms sector profitability.
Instead, lower call costs have merely led to the spreading of expenditure among Kenya’s four telecoms operators with only marginal impact on each operator’s revenues.
Telecoms operators warned that though consumers may in the short term enjoy the fruits of ongoing price wars, its ultimate result will be lower spending on infrastructure development and innovation that can only hurt consumers in the long term.
“Consumers who are currently enjoying the fruits of the price wars may very soon start feeling the pain of under-investment in quality improvement,” Mr Mikhael Ghossein, the Telkom Kenya chief executive, said.
Mr Ghossein said the more than halving of calling rates means the operators have lost at least 50 per cent of the revenues, laying the ground for guarded spending on infrastructure and product development.
“If consumers were calling for 100 minutes at Sh800 and still call for the same duration at Sh400, it means the operator has lost Sh400 and the consumer has saved a similar amount of money,” he said.
The big jump in subscriber numbers and a doubling of the time consumers are spending on calls did not however translate to a corresponding increase in revenues per user.
Instead, consumers took advantage of the lower charges to talk across networks breaking strangle-hold Safaricom has had on voice traffic in recent years.
This means that where subscribers previously spoke for 50 minutes a month, they now spoke for 30 minutes on network A, 25 minutes on network B, and probably spent a similar amount for data services on network C.
The CCK’s data shows that Telkom Kenya, Airtel and Yu may have finally broken what was informally known as the ‘ring-fence’ advantage that the market leader had on consumers with the rise in the number of cross-network calls from 187 million minutes the previous year to 405 million minutes in the quarter under the review, a 61 per cent increase.
Mobile tariffs dropped significantly during the third quarter of 2010 to an average of Sh2.65 for on-net calls per minute from Sh4.78 per minute in the preceding period representing a 33.4 per cent reduction on pre-paid call tariffs, says the CCK report.
Post-paid tariffs dropped to an average of Sh2.5 during the period, a 55.5 per cent fall from the previous period.
Mobile telephone subscriptions grew by 1.9 million in the period under review, representing 9.5 per cent growth but analysts said an increase in the number of subscribers has not translated to an increase in the duration of calls per user.
“Rather, these “additions” are either migratory customers or multi-SIM holders, said Francis Hook, an analyst with international research firm IDC. “Overall there are more SIMs in the market which operators count as their individual subscribers; thus distorting actual teledensity,” he said.
CCK says the average duration of calls per subscriber in the third quarter of 2010 did not rise past the previously recorded 100.3 minutes despite a 9.5 per cent increase in subscriptions.
The CCK data also indicates that the average revenues per user (ARPU) also decline during the period under review, translating to lower margins that point to a possible drop in profits across the board.
“It is difficult, if not impossible for the operators to prevent ongoing drop in ARPUs when the call durations double, but prices are more than halved,” said Tim McGinnis, a Nairobi-based telecoms analyst.
The latest developments are expected to slow down or bring to a stop the robust growth and super profits that the telecoms sector has been known during its 10 year existence even as the regulator realises its goal of pulling down barriers to cross-network traffic.
The dilution of subscriber revenues should also force the operators to prepare themselves for a new era of razor thin margins.
Airtime vendors are also expected to suffer a new round of revenue drop that may force operators to reconsider current distribution channels.
Safaricom has announced that plans to streamline its operations aiming at cutting the company’s administrative costs.
In its quarterly results released earlier this week, Airtel earmarked the launch of number portability in April as an opportunity to consolidate the gains it made in the past few quarters.
“We do not see porting leading to a huge loss in market share as subscribers had a way before to switch networks through multiple SIM cards,” African Alliance asset managers said a recent report.
Yu Kenya, which lost 19,000 subscribers during the period under review, indicated that it would not be investing in pricey technology upgrades as it attempts to manage its rock bottom voice tariff structure.
“We want to focus on marketing our services to users outside the current subscriber base. To achieve this and keep costs down, we are pushing for infrastructure sharing agreements,” said Atul Chaturvedi, the country manager for Yu Kenya.
Telkom Kenya, which faces a dual-edged problem of defending its fixed line business from further attrition and increasing its subscriber numbers, said it was leaning heavily on the CCK report indicating that the number of fixed lines declined to 228,391 down from 234,522 lines in the previous quarter -- a 2.7 per cent decline.
Similarly, the number of fixed wireless lines declined by 37.2 per cent to 141,580 from 225,592 in the previous quarter.
To gauge each operator’s subscriber base, the regulator requires them to submit own numbers, a method that does not allow independent verification of how many users own two or more SIM cards.
Analysts are also closely watching how the market will react to Airtel’s move come March, when its Sh1 per minute offer comes to an end.
“In 2008, we had similar movements between operators after a major price cut was announced. Once the offer came to an end, many of those subscribers simply went back to their old network’s SIM cards and it was discovered that many were dual-SIM holders,” said one analyst who did not want to be named due as he works in the industry.
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