How CCK cut off Safaricom’s fightback options

This regulatory measure is expected to further cut Safaricom’s dominance, and boost the ability of Zain Kenya, Telkom Kenya/Orange, and Essar’s Yu to compete on a fairly level ground in both the mobile money, data and voice business.

Analysys Mason argued that due to the popularity of m-payments,, Safaricom could maintain its grip on the market because its over 8 million M-Pesa customers would see little value in switching to rival networks just because they were being offered cheaper rates.

The consulting firm feared that one of the options open to Safaricom in the face of the price war is to offer cheap rates on its M-Pesa service to perpetuate the same club effect that the regulator is seeking to stamp out by forcing it to charge the same price both for calls made on its network and to rival networks.

Safaricom’s options

This leaves Safaricom very few options, apart from matching its rivals, which will see its calling rates reduced from Ksh8 (10 US cents, its highest tarrif) per minute to nearer the Ksh3 (3.7 US cents) that its rivals are charging, in order to maintain its profit margins or cushion against the effect of the price war.

Safaricom still has a lot of retaliatory room that could wreak havoc in the sector.

One of the most important findings from the Analysys Mason study is the true costs of setting up a mobile phone call on GSM technology, of a fixed wireless line call using CDMA and text messages in the Kenyan mobile phone industry — which were arrived at by simulating a notional start-up in each of those markets.

The study put the cost of setting up a call for a minute on a GSM network at 88 cents in Kenya or $01.1; and at 56 cents or $0.7 on a CDMA fixed wireless network, like that owned by Telkom Kenya.

It put the cost of SMS as low as Ksh0.04 (0.05 US cents) against the negotiated interconnection rate of Ksh2 (2.5 US cents), which it advised CCK to leave alone for the market to set.

It is feared that lowering SMS costs will result in spam and unwanted text messages, mostly from marketers.

If the actual cost of setting up a call is Ksh0.88, it explains the huge profit margins that Safaricom has been reporting since very few of its calls go out of its network and it was charging Ksh8 for its most expensive calls.

It also signals that Safaricom still has a lot of room to play in because it can afford to charge way below the Ksh2.21 interconnection rate.

Most of the operators can charge as low as they want profitably within their network.

By 2015, when the interconnection rate will be eliminated, this will not matter at all.

With pricing in the retail market converging, the focus will now turn to innovation and cost cutting.