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How CCK cut off Safaricom’s fightback options

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A “club effect” happens when consumers decide to subscribe to a mobile network, and they favour a operator with a high market share because they can make cheaper calls to a larger pool of subscribers and receive calls from a larger pool of subscribers at cheaper rates. Photo/FREDRICK ONYANGO

A “club effect” happens when consumers decide to subscribe to a mobile network, and they favour a operator with a high market share because they can make cheaper calls to a larger pool of subscribers and receive calls from a larger pool of subscribers at cheaper rates. Photo/FREDRICK ONYANGO 

By NICK WACHIRA

Posted  Monday, August 23   2010 at  00:00

The effect was that Zain lost such a huge amount of money compared with the network’s losses in Nigeria, that its parent company in Kuwait decided that it had had enough of the African adventure for which it had paid $3.35 billion in March 2005.

Zain Africa was sold this year to Bharti Airtel for $10.6 billion.

However, the decision by the Communication Commission of Kenya to lower the rate at which mobile operators can charge each other for connect calls across networks was meant to work as it is doing by sparking a price war in the Kenyan mobile phone market.

Last week, two Indian operators, Zain Kenya, which will soon change its name to Bharti Airtel, and Essar, which runs the Yu network, cut their calling rates to $0.0375 (Ksh3), which is in line with minimum rates charged in Tanzania.

This is $0.01 above the interconnection rate of $0.028 (Ksh2.21) set by the CCK last week.

Predatory retaliation

Faced with a situation with its rivals, who are loss makers, shouldering high fixed costs and razor thin profit margins and holding only a fifth of the market, Safaricom could easily wipe out its rivals by offering very cheap rates of perhaps Ksh1 per minute for a limited period for customers who call within its network.

However, a review of the advice given to CCK by Analysys Mason, the firm that was hired to consult on interventions needed to increase competition in Kenya’s mobile phone sector, shows that it had anticipated that Safaricom had this option, which in game theory could have seen it use a predatory retaliation strategy that would have still resulted in an imperfect market.

Thus, it is emerging that under the new pricing regime, Safaricom has been boxed in by ensuring that it charges its customers the same price for calls made to its network and those made outside its network. The same rule applies to all operators.

Analysys anticipated similar retaliations in the mobile money market and indeed it is likely that the next battle in Kenya’s mobile wars will be in the booming mobile cash transfer sector dominated by Safaricom’s M-Pesa services.

Analysys Mason advised that the regulator force operators to interconnect their mobile payment services.

CCK should also force operators to stop charging different prices that punish consumers who send mobile money across networks.

This is expected to box in Safaricom further in its response to the industry price war.

Under this pricing regime, customers will be able to send money easily between services like M-Pesa, Pesapap, Zain’s Zap, Orange Money and M-Kesho without price discrimination.

However, implementing such a system would need legal reforms instituted jointly by CCK and the Central Bank of Kenya.

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