Wednesday, October 20, 2010

Safaricom slashes international call charges by 90 p.c.

Raging price wars have seen consumer prices of mobile phone-talk time fall by more than 40 per cent. Photo/JOSEPH KANYI

Raging price wars have seen consumer prices of mobile phone-talk time fall by more than 40 per cent. Photo/JOSEPH KANYI 

By PAUL WAFULA

Safaricom has cut its international calling rates by nearly 90 per cent in an effort to defend its market share after its rivals made similar reductions in a move that looks set to further pile pressure on its profitability.

Kenya’s largest mobile telephony operator reduced its international call tariffs to Sh3 a minute from Sh25 for calls headed to USA, China and India, putting it at par with rivals Zain, Orange and YU.

Zain Kenya threw the first salvo by reducing its international tariffs by 70 per cent to Sh3 per minute on October 1 to be followed by Essar’s Yu that reduced its by 98 per cent to Sh2.50 a minute on October 5.

Orange followed suit on October 7 by lowering its charges for the three markets to Sh3 per minute from Sh8—putting Safaricom on the spotlight.

US, China and India accounts for the industry’s largest international traffic, making calls headed to these market a key battle front for the operators.

Analysts say the move by Safaricom will not hurt its earnings significantly given that international traffic accounts for a smaller share of its revenues.

“Safaricom must have taken longer to negotiate with the rest of international operators for a termination rates, but we don’t expect the international price cut to significantly affect Safaricom,” said Eric Kimathi, senior research analyst at African Alliance Kenya.

“The company must, however, protect its share of the market and be at par with the competition, and ignoring any front will be costly at this time.”

Safaricom’s rivals have operations in other markets and this made it easier for them to cut the international tariffs speedily compared to the market leader which only operates in the Kenyan market.

Zain Kenya, for example, said its international tariff cuts have been made possible by Bharti Airtel’s lower roaming rates in foreign markets.

Bharti Airtel — India’s largest mobile operator by subscribers — bought Zain Africa for $10 billion in June.

However, the operators have made minimal price cuts on traffic heading to Europe and Africa, save for Orange’s cut on calls for Sudan, hoping to tap into the growing traffic between Kenya and Juba—which now hosts a number Kenyan companies and business people.

Orange is charging Sh20 per minute down from Sh30, compared to Safaricom’s Sh50, Yu’s Sh40, and Zain’s Sh30.

Shaping up

Already, local tariffs have halved as the players race to grow and defend their market shares, and the operators warn that the price war is shaping up as the biggest threat to the industry’s earnings.

The cost of voice calls fell by 50 per cent in August to Sh3 per minute and consumers can now send short text messages at a rock-bottom price of Sh0.20, more than halving each subscriber’s monthly budget for airtime.

Safaricom is set to feel the biggest heat with the price wars gripping the voice market, since it is the biggest player and does not enjoy the benefits of its rivals who are active in bigger markets and can subsidise their Kenyan operations.

Safaricom draws about 75 per cent of its revenues from the voice market and is now diversifying to the data market to cushion its earnings from the volatile voice market.

Analysts are expressing doubts on whether Safaricom can sustain its profitability in the face of a price war.

Safaricom’s share price has fallen 14 per cent in the last three months—making it’s the biggest drop among firms listed at the Nairobi Stock Exchange (NSE) over the period— to Sh4.90, but is 29 per cent higher compared to past year.

Analysts led by Kestrel Capital East Africa, an investment bank, have downgraded the share.

“In all likelihood, we anticipate a downward rating of our valuations for Safaricom on account of lower revenue targets, contraction in EBITDA (earnings before interest, tax, depreciation and amortisation) margins and lower ARPUs,” said Kestrel in a September brief to investors.

Evaluate performance

Falling revenues especially on voice calls that account for 75.5 per cent of the firm’s revenue would impact on ARPU (Average Revenue per User), a key financial measure used to evaluate performance in the telecoms industry.

But Safaricom is putting a brave face in light of the market onslaught despite admitting that the turf wars are not sustainable.

“Price wars erode value and eventually kill off industries and by extension, economies,” said the CEO Michael Joseph. “What we can say at this point is that all indications are that the results are likely to be in line with our expectations.”

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