Matiang’i backs Airtel in push to break up Safaricom

Airtel Kenya, the country’s second largest telco controlling 16 per cent of the market, has been pushing to have Safaricom declared dominant in order to give the other players some breathing space. PHOTO | NATION

What you need to know:

  • Once declared dominant, Safaricom would operate in a more restricted business environment in terms of marketing, pricing and in extreme cases, be required to split the business into separate and independent units.
  • Airtel has since made a submission to CA demanding that it invokes the same power and declare Safaricom dominant.
  • In an interview with Smart Company, Mr Wangusi said although Safaricom is a dominant player controlling about three quarters of the market share, the regulator does not perceive the company as abusing its position.

A battle for control of the vibrant telecommunication industry has sucked in ICT Cabinet secretary Fred Matiang’i.

In a move that would jolt the industry and raise questions about the independence of the sector regulator, Communications Authority of Kenya (CA), last year, Mr Matiang’i wrote a letter demanding a brief on what the watchdog was doing in preparation to declare Safaricom a dominant player.

The letter received by the regulator on December 23, 2014 was written to CA Director-General Francis Wangusi and copied to his chairman, Mr Ben Gituku.

“The Kenya information and communications Act section 84W gives the Communications Authority of Kenya powers to declare a service provider to be dominant if their market share is at least 50 per cent of the relevant gross market segment,” Mr Matiang’i noted.

“This is therefore to request you to provide information on the consideration of the exercise of your powers as provided for in the Act, to address the issue of dominance in the telecommunications sub-sector of our industry. I look forward to your prompt advice on this matter.”

The latest industry statistics show that Safaricom controls all segments of the market — voice (75.6 per cent), SMS (93 per cent), mobile data (70 per cent) and mobile money (66.7 per cent).

PROFITABLE BUSINESS

Of the three players in the business — Orange, Airtel and Safaricom — Safaricom is the only one that has consistently reported profits.

Airtel Kenya, the country’s second largest telco controlling 16 per cent of the market, has been pushing to have Safaricom declared dominant in order to give the other players some breathing space.

Once declared dominant, Safaricom would operate in a more restricted business environment in terms of marketing, pricing and in extreme cases, be required to split the business into separate and independent units. Airtel has since made a submission to CA demanding that it invokes the same power and declare Safaricom dominant.

“The fact that Safaricom signed the settlement agreement clearly demonstrates that Safaricom acknowledges and accepts that they are indeed dominant in the mobile money transfer service,” Airtel notes in its letter.

“We are cognizance of the fact that the authority is the one mandated by the Act to declare Safaricom dominant and therefore submit our request to have Safaricom declared dominant in the mobile money transfer service.”

In his response to the minister, Mr Wangusi is categorical that while the law is clear on presumption of dominance for firms/operators with a market share threshold of 50 per cent, a lot need to be done before a decision is reached.

Mr Wangusi said there is lack of clarity on who, between the communications regulator and the Competition Authority of Kenya, should address the issue of dominance in the telecommunications business.

The current regulation on competition, published by the ICT ministry in 2010, equates dominance to abuse of the market. The regulator says this makes it difficult to declare a licensee dominant considering that the threshold of proof of abuse  is very high.

“In a progressive application of competition law and economics, dominance in and of itself is an important regulatory issue that attracts regulatory oversight. Equating dominance with abuse of the market, as is the case with the current regulations makes regulating dominance in the country onerous considering that dominant licensees do not always abuse the market,” Mr Wangusi said in his reply dated January 8.

In an interview with Smart Company, Mr Wangusi said although Safaricom is a dominant player controlling about three quarters of the market share, the regulator does not perceive the company as abusing its position.

POOR STRATEGIES

“You see, being creative and competitive is not abusing dominance in any way. You can’t cap someone’s innovation and creativity at a percentage so that you protect those who are not as creative and innovative. As far as we are concerned, there is fair competition in the industry,” he said.

 CA says regulatory focus should be on quality of the service mobile firms offer to their customers.

“I don’t see any major competition issue in the telecoms sector in this country. What needs to be addressed in that sector is the service that these firms offer customers,” Mr Wangusi said.

Analysts say that poor growth strategies and lack of consistency in the implementation of growth ideas are some of the reasons Safaricom competitors have failed to earn profits.

For instance, Airtel, which has been the main driver of the dominance debate, has changed ownership and rebranded four times in the last 15 years during which it has had nine chief executives.

Orange, which rebranded from Telkom Kenya, has had six chief executives in 14 years while yuMobile, which exited the market last year after it failed to break even, had been led by four CEOs over the six years it operated in the country.

Mr Wangusi said the regulator is critically looking at the question of dominance in the local communications industry.

“The issue of dominance is on our top priorities after digital migration. We have received many enquiries and opinions about it, including that of the Cabinet secretary, and we think the issue needs to be solved. We are therefore working with the Competition Authority to come up with an agreeable stand on this issue,” Mr Wangusi said.

The two institutions (CAK and CA) with technical support from the International Finance Corporation of the World Bank have developed a collaborative framework that has been approved by the Communications Authority of Kenya and is awaiting the endorsement of the board before execution.

The framework provides an elaborate co-operative approach in identifying and dealing with matters of concurrent jurisdictions in the resolution of competition questions.

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What Airtel wants once Safaricom is declared dominant

M-Pesa: To be hived off and operate as a separate and independent business with all other telcos allowed to use the service “so that customers are not locked in by M-Pesa to remain in Safaricom.”

M-Pesa tariff to be at a flat rate on both money transferred within Safaricom network and to other networks “to avoid price discrimination, which is currently detrimental to customers and creates a club effect which is similar to customer lock-in.” 

Infrastructure company: Isolate base stations and other network-related businesses to a separate and independent unit, which will be converted into a wholesale outfit, selling connectivity to other companies at regulated prices. The regulator to ensure that all telcos get the same quality of service.

Mobile phone services:

To be set up as a separate and independent unit that runs the retail business of selling voice, SMS and Internet to the public but at prices controlled by the Competition Authority to ensure the prices are equal or slightly higher than those of other operators. 

On Safaricom marketing:  Airtel wants the leading mobile company ordered to call for public consultation and commission studies on how giant marketing campaigns affect the market before carrying any promotions such as Tetemesha na Safaricom, Bonyeza Ushinde Na Safaricom, or redeeming of ‘bonga’ points. All operators, consumer bodies and the public to be given the opportunity to make representations and the authority to undertake detailed review of the proposed promotion with a view to understanding the impact of such promotions on the entire mobile business. The argument is that “none of the other companies is able to run a promotion of such magnitude due to the limited financial capability.”  

Call termination rates:

Given the market share of Safaricom and the nature of the Kenyan market, its rivals end up paying for calls terminated on its network and Airtel suggests that CA should impose a higher interconnection rate such that Safaricom pays 1.55 times the going rate. That means while Airtel and Orange will pay Safaricom 99 cents for calls terminating on it network,

M-Pesa: To be hived off and operate as a separate and independent business with all other telcos allowed to use the service “so that customers are not locked in by M-Pesa to remain in Safaricom.”

M-Pesa tariff to be at a flat rate on both money transferred within Safaricom network and to other networks “to avoid price discrimination, which is currently detrimental to customers and creates a club effect which is similar to customer lock-in.”

Infrastructure company: Isolate base stations and other network-related businesses to a separate and independent unit, which will be converted into a wholesale outfit, selling connectivity to other companies at regulated prices. The regulator to ensure that all telcos get the same quality of service.

Mobile phone services:

To be set up as a separate and independent unit that runs the retail business of selling voice, SMS and Internet to the public but at prices controlled by the Competition Authority to ensure the prices are equal or slightly higher than those of other operators.

On Safaricom marketing:  Airtel wants the leading mobile company ordered to call for public consultation and commission studies on how giant marketing campaigns affect the market before carrying any promotions such as Tetemesha na Safaricom, Bonyeza Ushinde Na Safaricom, or redeeming of ‘bonga’ points.

All operators, consumer bodies and the public to be given the opportunity to make representations and the authority to undertake detailed review of the proposed promotion with a view to understanding the impact of such promotions on the entire mobile business.

The argument is that “none of the other companies is able to run a promotion of such magnitude due to the limited financial capability.” 

Call termination rates:

Given the market share of Safaricom and the nature of the Kenyan market, its rivals end up paying for calls terminated on its network and Airtel suggests that CA should impose a higher interconnection rate such that Safaricom pays 1.55 times the going rate.

That means while Airtel and Orange will pay Safaricom 99 cents for calls terminating on it network, Safaricom will pay Sh1.5 per minute of a call terminating on other networks.

“Safaricom has much lower interconnect cost than Airtel due to economies of scale and if we implement asymmetric interconnection where Safaricom pays us more and we pay them less, we can invest the savings in the business to become more competitive and improve the market competitiveness for the benefit of consumers and the Authority.” 

Retail voice prices:

Airtel wants Communication Authority to force Safaricom to keep its calling rates at a flat fee for both Safaricom-to-Safaricom calls and for calls going to other networks.

Currently, Safaricom charges Sh4 for off-net call and Sh3 for on-net calls. The flat rate should apply and be the same even when Safaricom is calling out a promotion.

The authority should also set a point below which Safaricom cannot price its calling rate to safeguard the industry against low profits.

At the moment, Safaricom prices are the highest in the market with other operators forced to cut prices to woo customers. 

National roaming:

Communication Authority to order Safaricom to connect other operators in areas where they have no network coverage, in effect, enforcing mandatory national roaming on Safaricom.

This would make it possible for, say Airtel consumers, to make and receive calls in areas where Airtel has not invested in network but Safaricom has.

Safaricom would then pick Airtel customer’s signal and transmit it to the nearest Airtel base for onward transmission and termination.

Should the termination point be outside Airtel area of coverage but in an area where Safaricom has network coverage, Safaricom would then pick the signal from the last Airtel base and terminate the call.

This, Airtel argues, would level the playing field given Safaricom’s huge investment in network that it is now using to bar entry of other telcos into the industry.

“In the absence of infrastructure sharing obligations for mobile coverage sites in Kenya to aid in coverage, existing players and a new entrant will have to replicate the same infrastructure that an existing licensee has in order to compete effectively which definitely creates a disincentive and therefore a barrier to entry..”

Safaricom will pay Sh1.5 per minute of a call terminating on other networks. “Safaricom has much lower interconnect cost than Airtel due to economies of scale and if we implement asymmetric interconnection where Safaricom pays us more and we pay them less, we can invest the savings in the business to become more competitive and improve the market competitiveness for the benefit of consumers and the Authority.”

Retail voice prices:

Airtel wants Communication Authority to force Safaricom to keep its calling rates at a flat fee for both Safaricom-to-Safaricom calls and for calls going to other networks. Currently, Safaricom charges Sh4 for off-net call and Sh3 for on-net calls. The flat rate should apply and be the same even when Safaricom is calling out a promotion. The authority should also set a point below which Safaricom cannot price its calling rate to safeguard the industry against low profits. At the moment, Safaricom prices are the highest in the market with other operators forced to cut prices to woo customers.

National roaming:

Communication Authority to order Safaricom to connect other operators in areas where they have no network coverage, in effect, enforcing mandatory national roaming on Safaricom. This would make it possible for, say Airtel consumers, to make and receive calls in areas where Airtel has not invested in network but Safaricom has. Safaricom would then pick Airtel customer’s signal and transmit it to the nearest Airtel base for onward transmission and termination. Should the termination point be outside Airtel area of coverage but in an area where Safaricom has network coverage, Safaricom would then pick the signal from the last Airtel base and terminate the call. This, Airtel argues, would level the playing field given Safaricom’s huge investment in network that it is now using to bar entry of other telcos into the industry.

“In the absence of infrastructure sharing obligations for mobile coverage sites in Kenya to aid in coverage, existing players and a new entrant will have to replicate the same infrastructure that an existing licensee has in order to compete effectively which definitely creates a disincentive and therefore a barrier to entry..”

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REGULATION

What law says on dominant telco  vis-à-vis its rivals

 

The Kenya Information and Communications (amendment) Act 2013 section 84W (3) provides that Communications Authority of Kenya (CA) may, by notice in the Gazette, declare a person or institution to be a “dominant telecommunications service provider.”

Section 84W (4) gives the factors that CA should consider before making such a declaration.

The four factors include instances where the market share of the telecommunications service company is at least 50 per cent of the relevant gross market segment.

Level of control

The industry watchdog is tasked with looking at the level of control over the communications infrastructure, level of technological advancement of the telecommunications service provider and finally the scale of operations of the telco.

Communications Authority developed rules, the Kenya Information and Communications (fair competition and equality of treatment) regulations, 2010 to guide the industry in  implementing the provisions.

Among the provisions were the requirement that CA will “from time to time develop and publish, in the Kenya Gazette, guidelines to be followed when determining whether a licensee is in a dominant market position in a specific communications market but this is not a precondition to determining an institution as being dominant and therefore the authority is mandated to declare a company dominant under the current available primary and secondary legislation.”

Once declared dominant, a company must meet a number of conditions. One being accepting to  allow its competitors to use its network at “any technically feasible point on its telecommunications network.”

It is also required to adhere to the principle of non-discrimination with regard to interconnection.

Such interconnection must be given “under the same conditions and of the same quality as it provides for its own services or those of its affiliates and/or subsidiaries.”

Share infrastructure

A firm could also be forced to share infrastructure.

“The commission may direct dominant licensee to cease a course of conduct in that market which has or may have the effect of substantially lessening competition in any communication market in the manner described under regulation 10 or implement any other corrective remedies it deems appropriate,” CA says in the regulations.

— Charles Wokabi