Company information

Safaricom continues to look at ways to defend market share

As the price wars in the Kenyan mobile sector intensify, Safaricom last week slashed the cost of SMS’s by as much as 94%.

This is part of the firm’s response to Zain Kenya and Essar Telecom Kenya, which reduced the cost of calling subscribers on all mobile phone networks by half to Ksh.4 per minute, after the Communications Commission of Kenya on 19 August reduced interconnection fees by 54%.

Under this new SMS pricing, customers will be offered the option of buying a bundle of 100 text messages for Ksh.20, the equivalent of a unit price of 20 cents each, while it would also sell bundles of 20 texts for Ksh.10 and 5 messages for Ksh.5.

This strategy follows the company’s decision to cut on network call costs for the month immediately following the price cuts from Zain and Essar, as it looks to defend its roughly 78% market share.

Given Safaricom’s dominant size, it will be interesting to see how sustainable the price war will turn out to be for the smaller players, though with Bharti Airtel’s takeover of Zain and the fat cheque book which comes with it, the sector will certainly be interesting to watch in the months to come.

Meanwhile, the Kenyan Communications Ministry Permanent Secretary, Bitange Ndemo, has warned that the price cuts by mobile operators may be too deep and could result in revenue losses that may curb investment in the industry, to the detriment of the long term growth of the sector.

There are two sides to that argument though, with the World Bank in a paper it produced on the impact of lower interconnection fees noting that: “Interconnection terms and rates strongly influence new entrants’ investment decisions. They create operator anxiety over operational and cost implications of different interconnection carrier compensation models. Unfair terms and high rates will discourage entry or expansion.

“High rates can also lead to inefficient investments aimed at bypassing interconnection, as well as high consumer tariffs. It is well known that unbalanced interconnect practices and weak regulation have plagued and hindered the emergence of true multi-operators and competitive markets.”

Thus while the short term impact may reduce the profitability of existing operators following the fall in call rates, the lowering of interconnection fees in the long term actually encourages new entrants and a better competitive environment, all of which should yield cost saving benefits for the consumer.

Article produced by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.

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