How CCK cut off Safaricom’s fightback options

The events in Kenya’s mobile phone industry this week seemed almost like a textbook problem that an economics professor would pose to his or her students.

Imagine you are Michael Joseph, the boss of Safaricom, running a company so dominant at 80 per cent market share that it is virtually a monopoly.

What do you do if a regulator and three scrappy and money losing operators — which between them command a 20 per cent share and are overburdened with high fixed costs and thin profit margins — were to declare a co-ordinated price war against you out of the blue?

Remember, you are a dominant operator with 15 million customers — 12 million of whom are unique — and running a business cushioned by fat profit margins and that is estimated by African Alliance to generate $1.2 billion dollar in free cashflows over the next five years, or $4.2 billion in perpetuity.

Furthermore, all your rivals owe you interconnection fees, with some of the operators falling behind in the negotiated repayment plan. How would you respond?

The standard textbook answer would be the classic David versus Goliath battle that is happening in Kenya today.

You, as a monopoly, could reduce your prices, way or slightly below the costs that your rivals pay when their customers connect through your network.

Even put some of their debts in collection and deny them more credit, and wait as everyone flinches at self-destructive losses that they can hardly bear any more — then raise the prices back to monopoly level.

Among the things Safaricom can do is shift the battlefield to the mobile money market, where it is a dominant player.

There, it could exploit customer loyalty to M-Pesa by both delaying regulatory attempts to force interconnection with Zap, and Orange Money, and punishing, through surcharges those of its customers who send or receive money to and from rival networks.

A variation of this scenario has been played out in Kenya before, only that Safaricom did not have to cut prices much because of its “club” of 15 million voice customers and over eight million M-Pesa or mobile money transfer customers — which it jealously guards by offering them low rates on its network and charging exorbitantly when they call other networks.

Because of its market share, Safaricom earns a big chunk of its revenues from payments made by its rivals for letting their customers connect to its network for Ksh4.42 (5 US cents) a call.

Experts say that a “club effect” happens when consumers decide to subscribe to a mobile network and favour an operator with high market share because they can make cheaper calls to a larger pool of subscribers and will receive calls from a larger pool of subscribers.

This happens when the dominant player charges different rates for calling on and off its network. It limits consumer choice.

Indeed, so awesome is Safaricom’s market power through the “club effect” that two years ago, when rivals Zain, Orange and Yu launched an aggressive price war, Safaricom hardly seemed bothered. It continued charging the highest rates on the land.