Mobile firms reel from Airtel price cut

The move by Airtel Kenya to slash calling rates to Sh1 per minute during the day has sent shock waves across the telecommunications industry.

Operators and analysts, who seem uncomfortable with Airtel’s model warn that if further price reductions are to continue, massive job cuts, loss of government revenue and deteriorating quality of service will be inevitable.

The new turn of events has sent its rivals, Safaricom, Telkom Kenya and Essar Telecom, back to the drawing board in search of a viable and effective response.

Safaricom and Orange are warning that the model may threaten the viability of the Kenyan mobile industry and significantly dent government earnings from the industry.

“With these fights, there will be even more negative consequences for the market. Since mobile phone operators are some of the key employers in Kenya, the squeeze on revenue as costs are forced down will make operators begin to look to consolidate and cut operating expenses,” warns Mr Peter Wanyonyi, a telecoms analyst.

He expects to see concrete moves towards outsourced infrastructure operation and maintenance, with some firms looking towards getting rid of some staff as they hand over bits of their network to vendors to operate and maintain on their behalf.

“If this does not result in significant enough savings to maintain a semblance of profitability, then I would not be surprised to see mergers within the telecom sector as operators look to match Airtel’s economies of scale in the East African market,” he adds.

“Quality of service, will also suffer - unless there are regulatory moves from the Communications Commission of Kenya to put mandatory cost floors to prevent price wars getting out of hand,” said Mr Wanyonyi.

Industry lobby group, the Telecommunications Service Providers Association of Kenya (Tespok), also warned on Friday that if call rates continue to fall, the market will be in a total mess.

“The lowering of rates will erode confidence from banks and make it difficult for operators to access loans to fund expansion,” said Mr Joshua Chepkwony, chairman of Jamii Telecom and a member of Tespok.

Airtel Kenya, which triggered the tariff wars in August last year when it cut rates by 50 per cent to Sh3 across networks, defends its move saying it is in line with the strategy of its parent company, India’s Bharti Airtel of getting the mass market.

“Our focus at the moment is not on profitability but on the volumes,” Mr Rene Meza, Airtel Kenya managing director, told the press in Nairobi.

This is true given that Airtel Kenya’s parent firm, Bharti Airtel, knows better - the minute factory model, which involves low rates and high volumes.

Bharti Airtel chairman and group chief executive officer Mr Sunil Bharti Mittal recently vowed to make major changes in the mobile telephony industry in Africa.

During the Indian Economic Summit, Mr Mittal said that Bharti Airtel, which recently acquired the African operations of Zain in 15 African nations, plans to more than double the number of its mobile subscribers from 40 million to 100 million in the next two years.

He promised a simple strategy to achieve this milestone, replicating its Indian business model of low rates and high volumes on the continent.

Intend to expand network

“Compared to India, where mobile rates have fallen to as low as one cent, Africa still has rates of about nine cents,” said Mr Mittal, adding that they intend to expand their network and lower tariffs in order to increase their subscriber base.

Before last week’s decision, its move to lower calling rates to Sh3 across all networks in August ignited a major price war in the industry and forced other operators to re-think their strategies.

Yet, this is an established pattern in some markets where Airtel operates, a case in point is Sri Lanka where it was the 5th entrant.

There, Airtel’s price war caused significant financial losses for the industry and a significant drop in capital investment. The Sri Lankan regulator was forced to introduce a retail price floor and to increase interconnection rates to bring the industry back into a viable financial position.

But it is not only the operators who are feeling the heat from Airtel’s quick fire tariff salvo; subscribers continue to rejoice over reduced calling rates.