Lower interconnection fees to impact Kenya’s mobile market

The Communications Commission of Kenya (CCK) has cut mobile interconnection fees by 50% to encourage telecommunications companies to lower the cost of calls.

This comes after a recent report by UK-based consultants, Analysys Mason, who were appointed by the CCK to study calling rates in Kenya last month, recommended the halving of the fee telecoms providers charge one another for terminating calls.

The interconnection fee has thus now been reduced to Ksh2.21 a minute from Ksh4.42. The amount will be reduced to Ksh0.99 by 2013, before being eventually scrapped by January 2014.

Kenya has four mobile operators, namely Safaricom (the biggest by customers and market value), Bharti Airtel’s domestic unit known as Zain Kenya, Telkom Kenya and Essar Telecom Kenya.

Naturally the smaller operators have welcomed the development, with Safaricom having been accused by its rivals of perpetuating the ‘club effect’ by making it cheap to call within its network and prohibitively expensive across other networks. Zain Kenya reduced its call charges by 50% to Ksh3 per minute following the announcement, effectively the lowest in the country.

The mobile rate termination (MRT) debate is not new in Africa, having recently been very much in the news in South Africa, where the regulator is meeting some resistance from operators in terms of a proposed MRT reduction schedule.

The argument for reducing MRT fees is that particularly for example in Kenya where there is one dominant player, high MRT fees strongly influence new entrants’ investment decisions. The World Bank in a study on the matter listed among the concerns the fact that the high fees create operator anxiety over operational and cost implications of different interconnection carrier compensation models.

Unfair terms and high rates will discourage entry or expansion, and can also lead to inefficient investments aimed at bypassing interconnection, as well as high consumer tariffs. In a nutshell they hinder the emergence of true multi-operators and competitive markets.

What might the potential impact of this cut be on Safaricom’s revenues going forward? A study conducted by Econex in November last year, when looking at the potential impact a cut in MRT fees may have on South Africa’s mobile operators, found that national interconnection revenues’ contribution to the overall revenues of the mobile companies was fairly constant at around 20%.

Using this as a proxy, and deducting 20% of Safaricom’s voice revenue of Ksh.63.4bn, would have seen Safaricom’s FY 10 revenues being Ksh.71.3bn versus Ksh.83.9bn. Obviously this is a back of the envelope number, but it proves the point that this will have a notable impact on the company, allied with any resultant price war.

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