Yu mulls tariff rise to meet high cost of doing business

Essar Kenya is considering to raise call tariffs as part of a broader plan to raise profitability by 2014 in what could signal the end of a vicious price war  that started in 2010.

The operator of the yuMobile brand on Thursday said that the tariff review has been informed by the rising cost of doing business, which last year saw rival operator Safaricom raise prices by about 25 per cent.

Essar currently charges Sh3 per minute for calls headed to rival networks and does not charge for calls within its network, a pricing strategy that has lifted its subscriber base to three million from 1.58 million in June last year.

However, the growth has not been enough to lift Kenya’s third largest mobile telephony firm, which launched operations in November 2008, from losses.

“A price increase will be inevitable as we have to absorb inflation and the anticipated new taxes. At some point, the price will have to go up, lets understand it,” said Madhur Taneja, the country manager of Essar Kenya, at a press briefing.  “At the moment we are not making money but expect to turn profitable by 2014 driven by increase of customers, which will bring economy of scales to our network utilisation and also focus more on the value-added services.”

YuMobile, which is owned 80 per cent by India’s Essar Group, together with its rival Airtel, has preferred a budget model to gain market share in Kenya’s competitive mobile telephony market. But the model is making it difficult for the operators, save for Safaricom, to break even.

This has forced the company to rely on debt and its shareholders, that include a local venture associated with businessmen Peter Kibiriti and Jos Konzolo, to maintain its operations.

“As a loss-making company, we have relied on shareholders for the bulk of the Sh40 billion Yu has invested since its entry in Kenya four years ago,” said Mr Taneja in an earlier interview with the Business Daily.

“We are racing ahead of time by raising the $250 million (Sh21.3 billion) which will need new markets and upgrade of our infrastructure.”

The operator has appointed French global banking group BNP Paribas to arrange for a $200 million (Sh17.1 billion) financing that will be staggered over the next three years.

Essar had hoped in 2008 to break even in 2011, but this was scuttled by the decision of the regulator, the Communications Commission of Kenya, to cut the mobile interconnection tariff rate by half to Sh2.21 on July 1, 2010.

Before the CCK decision, mobile networks were charging customers a minimum of Sh8 per minute, but this has since dropped to an average of Sh3 a minute.

This market position worsened the earnings outlook of Kenya’s mobile phone operators’, prompting Safaricom last October to review its prices upwards by about 25 per cent after its net profit for the six months to September 2011 declined 47.4 per cent.

The higher tariffs helped lift Safaricom’s half year profit for the period ended September to 94 per cent at Sh7.7 billion.

The half ended September was based on a higher tariff of four shillings a minute compared to a similar half last year that was grounded on call rates of three shillings a minute.

Airtel charges Sh3 a minute and while Orange charges Sh4 a minute across the network and Sh2 a minute within the network.
Safaricom remains dominant with 80.7 per cent of Kenya’s mobile phone voice traffic in June with Airtel coming second with 11.2 per cent.

Essar’s controls 9.1 per cent market share in terms of voice traffic, which is an improvement  of the 3.3 per cent its held in June last year.

Essar is seeking to expand to rural Kenya and upgrade its network to 4G—which it will jointly own with the government and rival operators.

Kenya has many lower-end users who only make calls and send text messages, but its increasingly young and tech-savvy population is buying higher-end handsets that are increasing data usage across the country.