Monday, 13 May 2013

What Next for Kenya's telecoms industry?

1990s: Fixed line telecoms frustrated Kenyans
 who embraced Mobile telephony with a religious zeal
KENYA'S TELECOMS MARKET has reached maturity. This is the second market in Africa  to hit a plateau after South Africa. The driver of growth in the last decade, mobile telephony, has hit the plateau, meaning that from now on, vertical growth will be painfully slow.

There are 30 million subscribers in a country of 42 million people, meaning there are more mobile phone handsets than there are adults.  The result is a slowdown in growth of mobile penetration, which now hovers around 2.7 per cent quarter –on- quarter. This is not surprising as the telephone penetration rate now is 78 per cent, further dimming the prospects for future vertical growth in Kenya.

2013: This market is now saturated. 
What next for telecoms sector?
Vertical expansion is the acquisition of new customers thus expanding a company’s market share. In the early years of the last decade, this growth was rapid for there was latent demand for telecommunications services. That is no more. The days of growth rates above near 10 per cent quarter- on-quarter are gone.

Now growth is down to one per cent q-o-q, says the industry regulator, CCK, in quarterly report for the second quarter of 2012/2013.  

That Mobile telephony has reached it zenith is illustrated by the number of subscriber gains during the quarter. According to CCK, new subscriber gains declined by 59 per cent from 729,343 subscribers in the first quarter of 2012 to 298,072 in the second quarter. On a year to year basis, the decline was a staggering 81.2 per cent.

If we share the new addition among all players, this works out to about 33,219 first time applicant for each company that quarter. This is a 75 per cent dip compared to the second quarter of the year 2011. At that timer Mobile operators in Kenya gained, on average, 132,235 new subscribers each month.

With the vertical growth having reached a plateau, operators in the sector will grow the revenue streams by horizontal growth that is, introducing products that appeal to their customers.
 
So far such products are in the data/internet segment.  The regulator says that internet uptake posted 18.9 per cent growth over that period.  This segment is still growing posting some 0.9 million subscribers in the quarter to December 2012, an average of 0.3 million subscribers a month.

The number of mobile internet/data subscribers stood at 9.49 million in the quarter to December 2012, an 11.5 per cent growth over the previous quarter. However the population of users stands at 14.6 million and growing at 5.6 per cent a quarter. At this rate, it won’t be long before this segment also hits the plateau.

 This leaves mobile money transfer and mobile banking as the only outstanding sources of revenue growth for these companies. Mobile money transfer, or M-Pesa in whatever name, has reached 21 million subscribers, nearly 90 per cent of the adult population in Kenya. It moved some KES226.7 billion ($2.7billion) in the quarter to December 31, 2012. This is figure that would drive the local banking sector green with envy. At a growth rate of 10 per cent q-o-q, this segment is also looks headed for the plateau very soon.

Mshwari the Mobile banking segment is the latest addition to the menu of service rendered by the telecoms sector. But this segment which targets the unbanked Kenyans is facing stiff competition from the banking sector which has introduced agency banking, also targeting the same population. However, this one too is headed for the plateau, which leaves the question what next for the telecoms sector in Kenya?

 This is a question that should worry Safaricom, the largest mobile operator in the eastern Africa region. Safaricom controls 65 per cent of the telecoms sector in Kenya, the largest economy in the region.

Kenya is the second market in Africa to saturate after South Africa. And the experience of South Africa firms especially Vodacom is a motivation for Kenyans firms to widen out.

Being the largest player, the story of the telecoms sector in Kenya is more or less intertwined with the story of Safaricom. For her the question is what next? Does she continue with business as usual? Is it time for bare knuckled competition at home? This will not achieve much for a large segment of the population own more than on Sim cards and further, the tariffs have declined significantly.

 This, it seems, is the time to re-think strategy for the publicly quoted firm. Safaricom is owned 49 per cent by Vodafone, 23 per cent by the Government of Kenya and the other 28 per cent is listed at the Nairobi securities Exchange. This makes it a company under intense pressure to continue churning out large chunks of profits and pay large dividends.

Good old poaching of customers does not look attractive since there are few subscribers to poach anyway. Neither does repacking the old outfits, introducing new technologies and price wars.

Safaricom, it seems may have to adopt the MTN model of expanding out of Kenya into perhaps Ethiopia, Somalia, and South Sudan. She should even take the war to MTN in Uganda and Rwanda. She has the financial muscle to undertake such a venture and should start now.

 So why has she not flexed her muscles? Part of the reason was that she was consolidating her position at home. Another could she was cleaning her books having borrowed heavily in the 2000s.  It is also possible that has slowed down by Vodafone’s expansion trajectory in Africa. 

Vodafone UK is Safaricom’s part owner. In the late 1990s she zoned her expansion plans in Africa restricting her subsidiaries to certain regions.

This is why Vodacom of South Africa, is confined into the saturated market.  Vodacom is owned 50-50 by Telkom South Africa and Vodafone of UK. It is not clear whether Safaricom suffers such restriction since Vodafone does not operate in any other part of eastern Africa.  Time for Safaricom to expand in Eastern Africa is now!



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