Safaricom spending down as market war takes toll on profits
Safaricom CEO Bob Collymore. Photo/FILE
For years, the public has known Safaricom for its big spending on advertising, its network and for the fact that it has created a chain of local millionaires in the form of its dealers.
But after last year’s emergence of a vicious price war that has seen call costs fall by up to 80 per cent, the public will see a new face of the company.
“When prices slipped to the Sh1 mark late last year, we knew it was time to find a comprehensive solution to our falling voice revenues. We are banking on this model to tide us over the coming months,” said Mr Bob Collymore, the Safaricom CEO.
Mr Collymore calls this new vision Project Mavuno — a euphemism for Safaricom 2.0.
In its first three months, the initiative has saved Safaricom over Sh750 million in operating costs. Extending those gains will mean that a new set of winners and losers in the industry will be born.
The new face of Safaricom promises to change the business models of over 250,000 local companies in the industry even as it provides a pointer to the future direction of the mobile industry in general.
Among those who will be affected will be the company’s 230,000 dealers and several advertising firms who are likely to experience a shift in the way they earn their keep from the firm as it trims its commissions and marketing budget.
In the last six months, the company spent over Sh1 billion on advertising, including splurging a reported Sh60 million on its Niko Na Safaricom campaign. This amount is set to reduce drastically as the firm cuts spending. The reduction is already being felt by a number of small advertising firms who handle the firm’s marketing.
For dealers, many of whom have become million-shilling enterprises from their intermediary role of selling airtime, a period of reduced earnings is on the horizon.
“There will probably be a shift in the way we handle our dealers. This is a delicate area because we do not want to alienate them. But we must remain responsive to new trends like more top-ups via M-Pesa,” said Mr Collymore.
Winners will include the numerous small enterprises that the company will turn to as it transfers the responsibility of maintaining its network over to local firms.
The company hopes to drive down the operating expenditure of its base stations by between 20 and 30 per cent by outsourcing operations to local firms.
A number of small firms like Meltech Engineering and Elris Communications already help mobile firms to maintain their networks by ensuring they are fuelled and do not experience down-time. For some, this has turned into such a lucrative pursuit that they are now expanding regionally as more mobile firms adopt the outsourcing model.
“We recently concluded a Sh124 million deal with Fanisi Capital that will allow us to meet regional demand in the telecommunications sector said Francis Djirackor, managing director of Elris.
To lower costs which have gone up by 10 per cent over the last two months, Safaricom will turn to local firms who can assist it to cut network handling costs.
It shall ink agreements that will protect it from market fluctuations in fuel purchases with suppliers as it seeks to lower the cost of operating base stations that run purely on generators.
Safaricom’s competitors in the sector — namely Telkom Kenya, Airtel and Yu — are also set to benefit from the proposed changes, as the firm looks for partnerships that will see it share its own infrastructure, thus lowering the cost of building their own networks.Bharti Airtel and Essar have both pushed for network sharing, with the firms increasingly turning over network management duties to third parties.
Analysts argue that the developments are the positive result of a price war that begun last year when the Communications Commission of Kenya (CCK) asked mobile operators to lower the cost of interconnectivity between network by a third.
This drive has seen the price of calling on Safaricom —on whose network 90 per cent of local calls terminate —fall from Sh25 to Sh3 between 2009 and this year.
The CCK argues that lower pricing model will result in more widespread access to mobile telephony services, as cheaper prices encourage more people to join networks.
A section of operators have come out strongly against the cuts, saying the rock bottom prices — now the lowest in Africa, including South Africa where it costs up to nine times more to make a call —were not sustainable and would result in wide-spread losses and job cuts.
“Sh1 is not sustainable for any operator. We have chosen to shield ourselves using Mavuno. We remain hopeful that our views on the matter will be considered before July, when the next cut is expected,” said Mr Collymore.
Recently, Telkom Kenya attributed the cutting of 400 jobs at the firm to the pressures the business is facing as a result of the reduced pricing levels.
Telkom Kenya CEO Mickael Ghossein said the move is part of a wider cost-management plan that also comes with a Sh300 million cutback in the company’s marketing budget to Sh700 million.
As in Safaricom’s case, Telkom Kenya dealers are also expected to record lower earnings following the reduction of their commissions from a high of 14 and 18 per cent to the range of 12 to 15 per cent.
The changes in the voice market have also pushed mobile firms to turn to new revenue streams such as mobile data, which has become an important tool for generating revenues.
