Airtel Kenya and Telkom Kenya announced plans for the merger of operations under the brand name Airtel-Telkom, a joint venture that will form the second largest telco network in Kenya.
Although the merger still awaits regulatory approval and has been lauded by Treasury and ICT ministries, should Safaricom be worried?
The telecommunications industry in Kenya has undergone various transitions. Before 2014, Kenya had 4 mobile telecom providers; Safaricom, Airtel, Orange – now Telkom Kenya – and Yu Mobile Kenya with a total subscriber base of 33.6Mn customers.
The four had subscriber market shares of 66.7, 16.5, 9.2, and 7.6 percent respectively. Years later, Safaricom is still at the top of the industry claiming the majority of the market share. As of 3Q18, Safaricom was still leading with 64.2 percent share followed by Airtel at 22.3 percent, and Telkom at 8.8 percent as shown below.
Nevertheless, over the years, Airtel and Telkom Kenya have failed to gain traction due to Safaricom’s substantial investment. Compared to its competitors, Safaricom commands capital investments that average 35 billion annually compared to Airtel’s estimate of 1 billion shillings.
The ineffective competitive strategy has also been linked to the failure of the other telco companies to rise. Tariff rivalry (voice, SMS and mobile data) has mainly been between the two small players, with minimal price adjustment by Safaricom which currently charges a minute of call at 4.3 shillings compared to competitors’ price of 2.00 – 2.60 shillings a minute.
Will Safaricom Be Shaken?
According to Genghis Capital, Sustainable competition will be based on ecosystems in addition to the product. For example, Telkom’s mobile money platform ‘T-cash’ has a good angle towards simplifying payments without the inconvenient use of till/agent numbers.
“The problem is, it’s just a product currently and large investments would be required to build the entire network from infrastructure to agents to merchants and convince customers of its superiority,” reads a statement by Genghis.
Voice and SMS
Genghis claims that the merged entity could increase the prices of its voice and SMS services to support profitability bearing in mind that voice and SMS are no longer an effective competitive gizmo over Safaricom.
The two revenue streams could be accounting for over 80 percent of their service revenue (compared to Safaricom’s diversified revenue structure, c.48 percent from voice and SMS).
Price increases may not necessarily be through direct tariff increases but could be through less (voice minutes, SMS or data) for the same current price (certain packaged products).
A price increase would require a careful balance not to upset current on-net subscribers from completely switching network.
Where Does Airtel-Telkom Stand?
The expectation is that Airtel-Telkom will be a stronger and effective competitor to Safaricom, especially in the data segment.
However, the overall evolving Safaricom ecosystem will be a major challenge to penetrate unless the new entity comes up with unique offers that customers would badly need in place of, or in addition to, the current Safaricom platform.
Also, there are no expectations of a ‘collusive’ duopoly given the historical rivalry against Safaricom and the possibility of intervention by regulatory agencies. In the duopoly market, some level of competition will continue to exist.