Mobile price wars catch operators off guard

The game will now shift to launching new products that promise higher customer loyalty and good profits. Telkom Kenya is best positioned here because of the lucrative concessions it has extracted from the Kenyan government.

It now operates the national fibre-optic network, in addition to its fixed line and CDMA business, and it got a free pass to win annual multimillion-dollar government contracts to provide telecommunication services exclusively.

The French firm seems to have all it needs to dominate the data markets.
However, the feeling at Kenya’s Ministry of Finance is that France Telecom has a muddled strategy and poor strategic vision and execution. In the past two years, the company has blown tens of millions of dollars on trying to fight for market share in the GSM mobile market, where the odds are stacked against it.
Instead, they say that the French should have exploited the fixed wireless business, where Telkom, according to the Analysys report, enjoys almost zero cost of funding.
Last week, Telkom Kenya seemed to be allowing itself to be sucked further into the price war, lowering its call charges to Ksh2 (2.5 US cents) per minute, while at the same time seeking another intervention from the regulator.

It wants CCK to increase the interconnection rates for its fixed line businesses to create a barrier of entry against competitors, instead of thinking ahead to 2014, when interconnection rates will be scrapped in Kenya.

The paralysis at Telkom Kenya and its tendency to seek state protection could hamper it in terms of innovation and leave room for other operators to capture a bigger share of the data market.

Looming cuts

Analysts believe that Bharti’s low-cost operator strategy is bound to force a restructuring on Safaricom.

Bharti is counting on the fact that it can use its purchasing power, which delivers lower unit costs in India due to high volumes, to lower equipment costs for its African operations. But these costs do not in any case account for more than five per cent of the total.

In Kenya, due to the relatively small size of Bharti’s operations, the costs of maintaining base station sites are low. However, Bharti’s sales and distribution costs will be higher due to the higher commissions it must pay.

The big question now is whether Bharti’s cost base is lower enough than Safaricom’s to sustain the prices it has imposed on the market.

“That’s why they are fighting for regulatory intervention against us!” says Mr Joseph.