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Short of cash, Orange, Yu, Airtel, struggle to crack Kenya market

Saturday August 11 2012
telcos

From left: Yu Mobile Kenya's country manager Madhur Taneja, Airtel Kenya managing director Shivan Bhargava, and Telkom Kenya CEO Mickael Ghossein. Photos/File/TEA Graphics

The entry into East Africa of two India mobile phone operators was supposed to turn the industry on its head.

In theory, Essar, a conglomerate with interests ranging from smelting steel to outsourcing, and Airtel, the world’s fifth largest mobile phone company, should have caused havoc in Kenya, Uganda and Tanzania by imposing their low-cost, high-volume calling model, also known as the “minute factory,” on a booming industry with fat profit margins.

For Airtel, which became India’s biggest mobile phone company using this strategy, the plan was rolled out throughout Africa.

Three years later, though Kenya’s telecoms market is generally in deep trouble, the Indian players in particular seem to be mortally wounded.

According to Goldman Sachs, Airtel lost more money in Nigeria and Kenya — two of the most important mobile phone markets in sub-Sahara Africa — than in any other of its operations around Africa.

In Kenya, its losses mounted to $79.1 million in 2012, from $72.74 million last year. In Nigeria, Ghana and DRC, the firm lost $107 million, $61.58 million and $62.58 million respectively. In Tanzania and Uganda, the company lost $52 million and $28 million respectively.

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Overall, Airtel’s Africa’s business lost $271 million in 2012, which was still a marked improvement from losing $503 million in 2011.

As for Essar, it emerged last week that the conglomerate has hired a France-based investment bank to find a buyer for its Kenyan operation.

Essar has exited from the telecoms business in India and Yu is its remaining mobile phone company in the world. Essar Telecom said it will be looking to raise cash through the sale of shares or debt to fund its operations and capital expenditure. The amount of cash was not disclosed but the transaction is being handled by BNP Paribas, the French bank.

Though Yu has over one million subscribers, it is losing money and it needs more than Ksh12.6 billion ($150 million) to set up base stations that would allow it to offer a coverage level comparable to what Airtel has rolled out in Kenya.

Essar lost an estimated Ksh2 billion ($23.8 million) to Ksh3 billion ($35.7 million) in the past financial year.

Telkom Kenya is also losing money. France Telkom posted a loss of Ksh18 billion ($214.2) in 2011, leaving Safaricom as the only profitable company in the market, having reported a profit of Ksh12.6 billion ($150 million) for the year ended March 2012.

Telkom is currently negotiating a Ksh4.2 billion ($50 million) cash injection from the Kenya government, and it needs to roll over debts worth more than $500 million.

But even Safaricom is suffering. In May, it announced in its full year net profits for 2011 represent a four per cent decline from 2010, the second successive year that the company posted a drop in net profits, underscoring the increasingly turbulent environment mobile operators are operating in.

Despite subscribers calling for longer periods, Safaricom’s voice revenues declined by 1.7 per cent to Ksh63.5 billion ($730 million) but they still remain its biggest revenue driver, accounting for 66.9 per cent of total revenue last year, down from 68.6 per cent in 2009.

Last week, the market was awash with rumours that Essar was considering exiting all its African markets including Kenya. The firm—which in June 2010 pulled out of Uganda, after just seven months of buying into Warid Telecom, unable to raise the $300 million needed to drive its operations in Uganda and Congo—denied exit reports carried by the Financial Chronicle of India on Tuesday last week.

Mombasa Road-based Bharti Airtel said on Wednesday it could take more time to achieve a target of $5 billion in revenue and $2 billion in pre-tax earnings from its African operations, a goal it had slated for March next year. The firm, which trades as Airtel in 15 African countries, reported its 10th straight quarter of declining profits.

An analysis by The EastAfrican, looking at Essar, France Telecom and Bharti’s Kenyan operations, shows the African experiment is largely not working for them, for a number of reasons.

READ: Telecoms face tough times as margins fall, competition rises

ALSO READ: Airtel ruins the party with Africa telecoms wars

What the three seemed to have underestimated was, on the one hand, Safaricom’s pile of cash and on the other, the need to create resonance with Kenyan subscribers, once described by former Safaricom CEO Michael Joseph as harbouring “peculiar calling habits.”

Moreover, the price war that Airtel initiated has hurt industry margins without a corresponding increase in call volumes.

“The price war has brought call rates too low, shrinking earnings from voice, which account for over 70 per cent of the total. This means holding back on expansion,” said Angela Mumo, Telkom’s corporate communications manager.

Besides, all three borrowed heavily to enter Africa. Now they can no longer afford to invest in infrastructure to compete. Their entry into Kenya — where penetration rates are growing and average revenue per user (ARPU) is relatively low — has been a disappointment.

Analysts say that, to succeed, a company needs to expand its subscriber base cheaply and quickly, making money on small upfront payments of a few minutes at a time.

The coffers of the three telecommunication providers are empty, with the overall sector incurring losses of about Ksh12 billion ($140 million), according to their latest annual reports.

Yu said told The EastAfrican it had invested more than Ksh40 billion ($476 million) in its Kenyan operations so far.

“We intend to continue investing in the business to meet increasing demand for our services while expanding our network, as well as our commitment to investing in LTE (4G) in Kenya, ” the statement said.

Morgan Stanley and local analysts forecast that Safaricom will have reduced its net debt of Ksh10.4 billion ($128.8 million) as at the end of March this year to Ksh1.7 billion ($20.2 million) by 2015, putting the company in a good position to borrow for expansion or increase its dividend payment.

“Safaricom has a different way of raising cash since it is listed and it can use its retained earnings as well, since it has been profitable,” Eric Musau, an analyst with Standard Investment Bank said.

In Kenya, like in most African countries, subscriber growth and network competition have brought ARPU levels down by as much as 60 per cent over the past four years in some countries, a new report on African telecoms by PricewaterhouseCoopers says.

Caught between the twin forces of significant growth in subscriber numbers and falling ARPU levels, network operators have had to manage significant capital and operational outlays while seeing revenues fall.

“All of that is putting pressure on profitability, and operators are looking for every means to manage costs. Network performance degradation is often one of the first unintended consequences of the belt tightening,” says the PwC report, entitled Telecoms in Africa: Innovating and inspiring.

This is why Orange, Yu and Airtel are racing to raise cash and calling for a reductions in the mobile termination rate (MTR) to Ksh1.44 a minute.

MTR, the amount of money an operator pays other operators when its subscribers call their networks, is currently held at Ksh2.21, after regulators and industry players failed to implement the compromise rate of Ksh1.60.

Safaricom, the biggest beneficiary because with the largest subscriber base it receives most calls from other networks, favours the compromise rate.

“Driving the MTR lower and lower is not sustainable, because the entire industry is a net loss-making industry,” said Safaricom’s director of corporate affairs, Nzioka Waita.

“Without the industry making profits, investors are not able to get a good return on investment — which makes Kenya an unattractive market for investment overall. This hurts all the players in the market.”

But despite the increased competition from other operators Safaricom has maintained its calling rates in the knowledge that the Kenyan market, like other markets in Africa, has shown relatively low price elasticity of demand, unlike India.

Instead, Safaricom has relied on promotions, such as the current Wakenya Tuongee, which aims to increase the minutes of use to keep subscribers on its networks. It also has M-Pesa, the mobile money transfer service that has locked in subscribers on the network.

In April, Telkom Kenya made its promotional offer of Ksh10 daily flat fee for voice and data services within its network a permanent feature, as it sought to grow voice traffic and cut back losses. The firm had been running an offer dubbed Hola for the past 45 days, allowing its subscribers to make unlimited calls within its network and send 20 SMS free to Telkom Kenya subscribers and rival networks.

By Emmanuel Were, Mwaura Kimani and Christine Mungai

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