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

Saturday July 27 2013

The biggest winners are small operators, who will see a 20pc cut in the call termination fee they pay Safaricom. TEA Graphic

When in 2011 Mwai Kibaki, the then president, revoked a move by the Communications Commission of Kenya (CCK) to reduce the mobile termination rate, there was a lot of back-slapping at market leader Safaricom and its peer Orange. In contrast, the mood at the other operators — Airtel and Yu — is one of gloom.

Safaricom and Orange had every reason to celebrate. They had successfully led an onslaught against the market regulator’s policy of progressively reducing the MTR — the money a telco charges for terminating calls from peer networks.

The telcos argued that the policy would put at risk jobs, profits, investment in infrastructure, innovation and government revenue from one of the country’s fastest growing sectors. The CCK had planned to reduce the rate from Ksh2.21($0.026) to Ksh1.44 ($0.016) a minute from July 1 that year.

The two Indian operators, Airtel and Yu, on the other hand, had just spearheaded the most disruptive price war in the history of Kenyan telcos, in an effort to win market share, especially from market leader Safaricom.

READ: Airtel ruins the party with Africa telecoms wars

Their business strategy, known as the “minute factory,” which depends on low tariffs and huge volumes, appeared solely hinged on the undisrupted implementation of further reductions in the MTR. Understandably, they were deflated.


Glide path

But with the current regime at CCK led by director-general Francis Wangusi determined to implement the progressive reduction in MTR, known as “glide path” in the trade, the celebrations at Safaricom House and Telkom Plaza appear to have come a little too early.

The 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 third phase has commenced and the commission has so far received the deeds of variation from the respective licensees. Therefore, the response, consistent with a progressive telecommunications environment, and the law, has been positive,” Mr Wangusi told The EastAfrican.

A survey of the country’s three main telcos showed they had started implementing the new MTR.

Even then, the lobby against the CCK’s glide path would appear to be still seething, with at least Safaricom and Telkom having some residual issues regarding the way the MTR has been determined by the regulator.

The glide path is based on a study conducted by UK telecoms consultancy Analysys Mason, which got the job after a tendering process. The MTR is meant to reflect the cost a telco incurs in terminating a call from another network.

“Despite Orange applying these new MTR rates, the glide path is not realistic. It is imperative that a comprehensive study be conducted to assess the impact of a further reduction in MTR to the telecommunication sector. This study will help to determine conclusively the actual levels at which termination rates should be set, resulting in a positive impact on the telecom sector’s investment in the long term,” said Telkom CEO Mickael Ghossein.

Safaricom maintains its traditional opposition to the MTR reduction, but is perhaps resigned to the reality that a new study may not be feasible before July 1, 2014, when the next fall in the Kenyan MTR is due.

“We have maintained that the methodology used by CCK to establish the MTR should not be applied to emerging economies that are still grappling with the significant issue of infrastructure expansion,” said Safaricom corporate affairs director Nzioka Waita.

But the CCK swears by the Analysys Mason study and argues that in any case, data was provided by local telcos, including the dissenting duo.

“It is important to note that there are no models used to determine the MTR that are specific for developed or developing countries. In fact, the model applied by the commission is now the most preferred across the telecommunications sector worldwide,” said Mr Wangusi in an e-mail response.

Airtel, whose business strategy has relied heavily on price, backed by tight cost management, is, as expected, happy with the MTR reduction, saying it was based on an “elaborate scientific industry cost study,” that was supported by all operators in the country.

The reduction has given Airtel a chance to further tweak its tariffs as it continues its long-drawn out battle for subscriber numbers, a quest that many now feel is running out of gas.

So what does the glide path and reduction in MTR mean for subscribers and operators? And what strategic options are open to telcos as the MTR tends to near zero?

Based on recent form, subscribers should not expect any major movements in tariffs, at least not of the type that caused the tariff wars in 2010/11. Only Airtel and Orange would appear to have room to tweak their tariffs.

“We have passed the savings onto our customers through new product offerings that are designed to fit their unique individual needs. For a start, Airtel recently launched the new value bundle Airtel Tosha, which gives our customers up to 20 times more on voice calls, SMS and data on a low daily subscription rate in anticipation of the glide path implementation,” said Airtel Kenya managing director Shivan Bhargava.

On his part, Mr Ghossien said: “Orange recently made its Tujuane voice tariff permanent, allowing mobile customers to enjoy SMSs, on-net and off-net at Ksh1 ($0.11), on-net calls on both the mobile and fixed network at Ksh2 ($0.22) and off-net voice calls at Ksh3 ($0.035). On our network, a call from an Orange mobile line to an Orange fixed line is an on-net call charged at Ksh2 ($0.22) per minute.”

A call from a mobile to a fixed line is considered an on-net call, a unique advantage for Orange.

Muriithi Muriuki, a telecoms analyst at Summit Strategies, said he did not expect material changes in the tariff as a result of the fall in MTR.

“It has everything to do with the structure of the Kenyan market. Where you have one operator accounting for almost 70 per cent of all mobile traffic, there can be no competition to speak of,” said Mr Muriuki.

Without giving a precise figure, Safaricom confirmed the obvious: That it receives the highest share of incoming calls from other operators.

“Correspondingly we bear the highest costs to terminate these calls to our subscribers,” said Mr Waita.

Winners, losers

Inter-operator traffic is estimated to be about 1 billion minutes per quarter, based on the latest CCK reports.

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

The latter, on the other hand, will benefit from the lower fees, but on a comparatively lower volume of calls that its subscribers make to other networks. The biggest limitation for the market leader will be the capacity burden on its network to accommodate all calls from peer telcos at a lower cost.

Airtel estimates that 37 per cent of the calls on its network originate from peers, while 63 per cent of calls by its subscribers terminate outside. At Orange, the ratios are 26 per cent to 49 per cent, respectively.

Mr Muriuki argues that the downward pressure MTRs have on tariffs can only be seen in high density, competitive markets like Sri Lanka and India, where what telcos pay out as call termination fees almost equals what they receive.

According to Alex Gakuru of the Kenya ICT Consumers Association, the lack of downward movement in tariffs, in tandem with the glide path is symptomatic of “market failure.”

“The CCK should be empowered to investigate the possibility of anti-competitive behaviour by some operators. I cannot discount the possibility of price fixing and collusion,” he said.