Will Airtel Kenya’s move to raise call rates end price wars among telcos?

Saturday September 14 2013

The firm’s tariffs are now slightly higher than those of market leader. FILE/TEA Graphic

It may have passed off quietly, but Airtel Kenya’s announcement on August 31 that it was raising its calling rates carried with it a significant game-changing signal in the telecoms industry — a shift in strategy from price as a major selling point.

Airtel Kenya — backed by Indian conglomerate Bharti Airtel, the world’s fifth largest mobile phone company — announced a Ksh0.42 (0.48 US cents) or 11 per cent increment in tariffs.

This translates into an off-net rate of Ksh4.02 (4.6 US cents) per minute and on-net rate of Ksh4.02 per minute during peak hours on two of its major tariffs (Klub 254 and Vuka). Airtel also increased off-net charges of its Feelanga Free tariff by Ksh0.42 per minute.

The raise brings the firm’s tariffs to a level slightly higher than that of market leader Safaricom, its main rival.

Analysts argue that by raising its call charges, Airtel was admitting that the “minute factory model” — which focuses on generating as much volume of usage as possible from each base station — which had made the company a huge success in India, combined with a low-cost structure, had failed in Kenya. Airtel, however, did not confirm whether the price increment marks a shift in its strategy.

The adjustment could also signal an end to price wars that have seen mobile phone companies engage each other over the past three years, in a bid to attract subscribers.


ALSO READ: Will data help cushion telcos as voice revenues decrease?

In October 2011, Safaricom raised its calling rates by an average 25 per cent following a 47 per cent drop in profits in the six months to September of that year. On-net calling rates rose from Ksh3 (3.4 US cents) per minute to Ksh4 (4.59 US cents), while the price of calls to other networks were raised briefly to Ksh5 (5.7 US cents) per minute from Ksh4 (4.59 US cents) per minute, before being lowered to Ksh4.

In January this year, Essar Kenya (Yu) slashed the cost of calling rival networks by 17 per cent in a bid to grow its subscriber base, only weeks after it had increased the tariff by 20 per cent on December 1 last year. The cost of calling Safaricom, Airtel and Telkom Kenya (Orange) from Yu’s network dropped to Ksh3 ($3.4 cents) a minute from Ksh3.60 ($4.1 cents).

Orange Kenya introduced a new tariff in April this year dubbed Tujuane, which saw off-net calling rates drop to Ksh3 (3.4 US cents) per minute from Ksh4 (4.49 US cents). The company also reduced the on-net calling rates from Ksh2 (2.29 US cents) to Ksh1 (1.14 US cents) per minute.

“The price wars that were initiated in 2010, and which have had such a devastating effect on all players in the market are finally behind us,” said Safaricom CEO Bob Collymore at the company’s AGM on Thursday.

“Despite recent price rises by our competitor, airtime costs in Kenya are still the lowest in Africa (alongside Angola), and we have always cautioned that these prices need to be at a sustainable level so that the industry can continue to invest in the ICT sector that drives economic growth.”

Analysts also see Airtel’s price adjustment as intended to increase the firm’s cash flow and help it fund investments in data infrastructure, in a market it is yet to make a profit since it started operations.

“You could look at it as an admission that the tariff and price wars are not working for them,” said Eric Munywoki, an analyst at stockbrokerage firm, Old Mutual Securities. “Airtel could be counting on the tariff increment plus the gains from the mobile termination rate (MTR) to drive future performance.”

The MTR is what mobile operators charge each other for calls ending on their network.

Weak African operations including those in Kenya have been hurting Bharti Airtel’s profitability over the past few years.

Losses in Africa

According to investment banker Goldman Sachs, Airtel lost more money in Nigeria and Kenya — two of the most important mobile phone markets in sub-Saharan Africa — than in any other of its operations around the continent in 2012.

In Kenya, Airtel lost $79.1 million in 2012, up from $72.74 million the previous 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. Overall, Airtel’s Africa’s business lost $271 million in 2012, which was still a marked improvement from the $503 million the firm lost in 2011.

When Indian telecom giant Bharti bought Zain’s Africa operations in 2010 — which it later re-branded to Airtel — the company hoped that the “minute factory” model it had exported into the continent would trigger a rise in calling minutes per user, and help drive profitability.

Under the model, the company sought to reduce its fixed costs as well as outsource most of its network, planning and IT backbone. IBM handles IT, Huawei the network and Spanco the call centres.

The reduction in fixed costs had allowed it to lower its calling charges, helping to conquer the Indian market to become one of the largest telecom companies in the world.

The model, however, failed to pick in Africa largely because whereas in India the average calling time per user increased as the rates became cheaper, on the continent, the cheaper the rates became, the less people called.

According to the latest CCK report, about 53 per cent of all Airtel calls end up on rival networks, meaning the planned rise on all off-net calling rates will be significant in increasing its revenues.

In the three months to March, Airtel subscribers made calls totalling 446 million minutes to other networks and spent only 391 million minutes on calls within the network.  

Safaricom customers spend 5.4 billion minutes on calls within its network and 311 million minutes on calls ending in other networks. Yu customers spend 419 million minutes making calls to customers within the network and 135 million minutes to other numbers. Orange customers spend 57 million minutes making calls within the network and 38 million minutes on calls to other mobile operators.

Late last year, there were expectations that operators would take advantage of the drop in MTR to further lower calling rates. Safaricom and Orange argued against such a drop saying it would hurt the industry.

The Communications Commission of Kenya (CCK)  has started implementing the third phase of the reduction, which saw the MTR fall from Ksh1.44 ($0.016) to Ksh1.15 ($0.013) starting July 1. Next year, the rate glides to Ksh0.90 ($0.01).

The biggest winners from the fall in MTR will be the smaller operators, which Safaricom says will see a 20 per cent reduction in the call termination fees they pay the telco.

For Safaricom, which will benefit from the lower fees on a comparatively lower volume of calls compared with what its subscribers make to other networks, its biggest limitation will be the capacity burden on its network.

READ: As key calling rate in Kenya drops, market leader feels the pinch

With voice revenues nearing maturity and Safaricom enjoying about 75 per cent market share, data is seen as the last frontier in the battle for revenue between the mobile phone operators across the region.  For example, whereas Safaricom’s voice business grew by only 13 per cent in the year ended march 2013, the firm’s data revenue grew by 29 per cent.

Safaricom has said it intended to spend Ksh25 billion ($287 million) in the 2013/14 financial year to upgrade and expand its Internet infrastructure in a bid to further cement its position as the country’s dominant telecommunication company. Over the past three years, Safaricom’s 3G base stations have risen from 607 to 1,604.

The growth in non-voice revenues has helped Safaricom grow its earnings. In the 12 months to March this year, Safaricom announced a 38.9 per cent increase in profits buoyed by its money transfer platform M-Pesa, text messages and data revenues.

Net earnings for the year ended March 31 stood at Ksh17.5 billion ($201 million) compared with Ksh12.6 billion ($144 million) posted last year. Its revenues grew to Ksh124.3 billion ($1.4 billion) with M-Pesa contributing Ksh21.8 billion ($250 million), SMS Ksh10.1 billion ($116 million), data Ksh8.4 billion ($96 million) and voice revenues accounting for Ksh77.6 billion ($891 million).