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Airtel vs. Safaricom

By Morris Kiruga, in Nairobi
Posted on Monday, 26 November 2018 13:37, updated on Friday, 8 March 2019 16:41

A customer sets up an M-Pesa account.
A customer sets up an M-Pesa account. Reuters/Thomas Mukoya

Airtel Kenya is cutting prices to eat into Safaricom’s market share, but it may not have a big enough war chest and sufficient patience to succeed in knocking the Kenyan telecoms leader down a notch.

Shortly after Safaricom chief executive Bob Collymore returned to work after a nine-month medical leave in August 2018, he found himself back in the trenches. In the past two decades, the Kenyan telecoms sector has had several scuffles over consumers, often ending up in slashed costs. Airtel Kenya is using every tactic it can to get out from under the shadow of its giant rival; these range from cutting the cost of calls to seeking government intervention in order to level the playing field.

“We are seeing a new price war coming,” Collymore told a press conference in Nairobi. Days before, Safaricom’s main competitor Airtel Kenya, a subsidiary of Indian behemoth Bharti Airtel, had slashed call rates. Airtel wants to trade revenue for market share.

So far, Collymore is insisting that Safaricom is unwilling to participate in a competition over price and will accept to see its vast market share somewhat eaten into by Airtel, which has been picking up subscribers over the past two years. Airtel’s strategy will test the patience of the shareholders of its Indian parent company, as lower call tariffs will further reduce revenue. Airtel is fighting a price war in India, and is planning to list about 25% of its African operations on the London Stock Exchange in 2019 to help it deal with its big debts.

M-Pesa’s impact

Kenya’s telecoms and mobile-­money markets are still growing, especially with the uptake of mobile loans (see TAR103, Sept. 2018). Between April 2017 and March 2018, the mobile-­money market moved a combined KSh3.5trn ($34.6bn), a KSh219bn increase from the previous year. Safaricom’s M-Pesa platform was home to more than three-quarters of the total amount transacted.

In April 2018, former central bank governor Njuguna Ndung’u, told the Business Daily that M-Pesa “has generated a vibrant economy”. While the M-Pesa journey began the year before his tenure started, it was during his time that it became a household name.

The fight for Kenya’s lucrative telecoms market is dominated by Safaricom and Airtel – the latter having had various incarnations as Kencell, Celtel and Zain throughout its history. While there are several smaller players, such as Telkom Kenya and Liquid Telecom, the competition is primarily between these two main players, with Safaricom the giant and Airtel the upstart.

As of 2018, Safaricom controlled 90% of revenue in the traditional telcom markets of voice calls and text messages. It has 29.5 million subscribers: at least 20 million more than Airtel Kenya. In a country with an estimated population of 51 million people, Safaricom is in the lives of more than half of the country’s citizens. But most consumers have more than one SIM-card, as one cellphone-user explained during a lunch break in mid-October: “I have both so whenever one lowers prices, I use that one, and then switch as they fight on price.”

Airtel Kenya’s attempts to innovate in Kenya have not all been successful. For example, it launched the farmer-focused Airtel Kilimo in 2013 with the hope of signing up 200,000 customers by the middle of 2014 for a service that provides weather information, advice and market prices. Only slightly more than 20,000 had subscribed by December 2014, according to a study by the GSM Association.

Telecoms engineer Prasanta Das Sarma has been running Airtel Kenya since February 2017. He has been looking to replicate the success of Airtel Bangladesh’s major growth in customer numbers.

In its eight years of operation, Airtel Kenya has never made a profit, despite the growth of the telecoms and mobile-money ­markets. The company has tried to grow through acquisitions. It bought yuMobile’s Kenyan customer base of 2.5 million subscribers in 2014, while Safaricom purchased yuMobile’s Kenyan infrastructure. In early 2018 Airtel Kenya executives were in talks to acquire Telkom Kenya, which has a subscriber base of about four million, but those negotiations fell through.

Airtel Africa, the continental subsidiary within which Airtel Kenya operates, has only begun reporting positive margins recently, with its profits for the first quarter of 2018 tripling to $154.2m from $57.5m the last quarter of 2017. Airtel Africa was said to be considering selling some of its assets after a prolonged period with no positive returns, but management has now denied that.

Threats to leave

Airtel Kenya has wrested some more market share as the unit bleeds the mother ship. It has changed strategy and chief executives several times. In 2015, its managing director at the time, Adil El Youssefi, threatened that the company would quit Kenya if the government did not intervene and solve the problem of Safaricom’s dominance of the market. “We’ve been trying for over five years,” El Youseffi told the Business Daily, “We’ve lost over KSh50bn ($495m) and not made even a single dollar in ­profit.” ElYoussefi eventually left to head yet another of Safaricom’s competitors, Liquid Telecom, but his successor at Airtel Kenya took up the same fight.

In February 2017, the Com­munications Authority of Kenya debated a report it had commissioned from the consultants at Analysys Mason about competition in the telecoms sector. The report recommended that Safaricom should be divided into two: a telecoms company and a ­mobile-money company.

M-Pesa’s rapid growth has been Safaricom’s ticket to success (see graph). The mobile-money platform has given a mere telecoms company a commanding role in the new ecosystem that links telecommunications and the financial industry. By offering such a compelling service –money transfers, payments and now deeper banking services– it has made Safaricom’s offer more ‘sticky’, in marketing jargon.

But the Analysys Mason report says that unless all existing mobile-­money players in Kenya can interoperate, then Safaricom’s current position is dominant and unfair to other players. Earlier this year, a platform-level inter­operability system linking M-Pesa and Airtel Money, Airtel Kenya’s mobile-­money service, was launched in an effort to solve the problem. The question remains of how exactly the government can intervene without hurting Safaricom’s revenue or a core part of the economy.

Legislators don’t listen

In mid-2018, Airtel Kenya and Telkom Kenya put up a united front before the national assembly, which had invited senior executives of all the telecom companies to appear before the information and communications technology (ICT) committee.

During the audience, ICT committee chairman William Kipsang took Airtel Kenya’s chief executive, Prasanta Das Sarma, and executives from other companies to task. “Why would you want parliament to punish success when one player is doing better than the rest of the telecommunications firms?,” he asked.

In a document submitted by Airtel Kenya to the national assembly, the company demanded that the government act on the recommendations of the Analysys Mason report. It said either the government declare Safaricom dominant or it must fully implement mobile-money interoperability.

The challenge proved to be an uphill struggle, partly because Safaricom is a partially government-owned company while the other five players are owned by foreign companies. Safaricom is currently majority-owned by the Kenyan government and Vodacom of South Africa, with a quarter of the company owned by the public. The laissez-faire approach to regulation has given Safaricom the chance to grow into the most valuable company in the East and Central African regions while its competitors have continuously struggled.

Safaricom has also been more stable than its competitors, having only had two chief executives in its 18-year history. A period of prolonged growth was weakened somewhat by Collymore’s long medical sojourn. His return should re-invigorate the brand.

The question of whether Airtel will eventually make money in Kenya is difficult to answer, as the East African country enters a period of austerity and possible changes within its economy and politics. The Nairobi government is unlikely to declare one of its best assets and a significant source of revenue dominant.

The Safaricom brand has become a part of the Kenyan state, especially under the tenure of President Uhuru Kenyatta. In 2017, for example, it was revealed that the treasury paid Safaricom KSh7.5bn to install closed-­circuit TV cameras and networks in Nairobi and Mombasa. The system runs on the 4G+ spectrum, whose assignment to only Safaricom in 2015 was a trigger for Airtel Kenya’s chief executive’s threat that the Indian company would exit Kenya.

But Airtel Kenya could still seek other means to achieve the same result, such as using the courts to get anti-trust laws implemented. After eight years without positive results, it is also possible that Bharti Airtel could choose to quit Kenya, and perhaps other African markets where it has been bleeding money. For the sector as a whole, lower prices are likely to hurt profit margins as consumers become more price-wary, with increased taxes on mobile money, data and airtime. In September, President Uhuru Kenyatta’s government increased taxes on mobile-money activity from 12% to 20%, while excise duty on airtime went up from 10% to 15%. In the budget proposal, treasury cabinet secretary Henry Rotich said the increased revenue would be used to fund the universal healthcare budget.

While the two main telcos are financial behemoths that can survive, their prolonged fight for market share is peaking at a time of economic uncertainty. They are unlikely to stop and sue for peace, though the government could be forced to implement the interoperability system fully in a bid to reduce tensions. But, stuck in an expensive war of attrition, the companies may be missing opportunities to innovate. Mobile money launched more than 10 years ago – will the next breakthrough happen in Kenya or someplace else?