Telcos expected to witness fall in revenues due to tariff wars

File| NATION
A mobile phone user in Nairobi. The price wars among telecommunication companies will impact negatively on their revenues but for consumers, the low rates are a boon.

What you need to know:

  • Listed firm Safaricom was the first to admit tariff cuts had hurt its revenues, especially in the last two months of the half-year

Intense mobile tariff wars in 2010 are expected to slow down the telecommunications industry.

Analysts say the tariff cuts by more than 50 per cent initiated by Airtel Kenya, which its competitors responded to, will have a significant impact on the industry’s revenues and profits.

The reduced tariffs will lower the average revenue per user and operating margins for all of them.

Mr Eric Musau, a research analyst at African Alliance Investment Bank, said in a recent interview that profits will be lower.

“We could see some providers opting to service a particular segment of the market.”

Lower rates are important to increase penetration, but profits must be taken into account since they would make investment possible in new products and services,” Mr Musau said.

Mr Peter Wanyonyi, a telecom consultant, says small operators will have to slash costs while improving services.

“This is going to be horrendously difficult in a market like Kenya, where the number of potential subscribers is always going to be low compared to the likes of India,” Mr Wanyonyi says.

This raises questions on how long operators will be able to hold on with the current pricing.

Slashed

Kenya’s telecoms regulator, the Communications Commission of Kenya slashed mobile interconnection charges in August and Zain (now Airtel), the second largest mobile operator owned by India’s Bharti Airtel, sparked the price war by halving its call tariffs..

Safaricom, Orange and Yu followed suit making drastic price cuts.

In the last few years, Kenya has seen a phenomenal growth in mobile phone use and now has more than 20 million subscribers.

The mobile phone airtime has become an essential tool for Kenyans that made the statistics agency — the Kenya National Bureau of Statistics to add airtime into the inflation basket.

Mobile phone airtime attracts hefty taxes that include a 10 per cent excise and 16 per cent value added taxes.

Operators lament that taxation drives up the cost of using a mobile phone and so limits their contribution to the economy.

While releasing half year financial results recently, Safaricom chief executive Mr Bob Collymore said that revenues in the last two months of the first half of the financial year were hit due to increased competition and price wars.

“We were all affected. We will see pressure on voice revenues for sure,” he said.

Mr Collymore has said that Safaricom’s revenues could drop “by between Sh20-30 billion”.

Mr Mickael Ghossein, Telkom Kenya chief executive officer says his firm has been has been hard hit with the business performance 30-50 per cent down.

“We have lost revenues, and are not matching our budget,” says Mr Ghossein, in an interview recently, adding that it is scary for the future of the Telkom Kenya and the country in general.

With the ongoing price wars, Mr Ghossein says, “We can easily close shop if we charge less than Sh3 for off-net calls. The market is in a big mess.”