With the pullout of two mobile phone firms, is this a sign of market failure?

Two key foreign investors in the mobile telephone market have sent notice that they will be shipping out of Kenya.

The Indian company, Essar, has been the majority shareholder in the brand, yu, while French conglomerate France Telecom has been the major shareholder in the brand Orange.

We need to ponder the full implications of these major developments. How is the industry likely to shape up going forward? Are we staring at market failure? What does all this say about the state of regulation of the sector?

Until recently, the understanding was that yu would sell its key assets to both Safaricom and Airtel. Safaricom was supposed to buy the spectrum from yu, with Airtel taking over the customers.

From what I gather, this is the proposal that was placed before the government.

It all made sense to me for the following reasons: In the first place, we were going to avoid an impending liquidation of a mobile phone company.

Liquidation is bad for the reputation of the country as an investment destination. More importantly, it damages the credit rating of other companies in that sector.

NO SUPPORT

Secondly, a deal between yu on the one hand and Safaricom and Airtel on the other, meant we were not going to get some fly-by-night chap interested in  buying the spectrum in the hands of yu on the cheap, only to flip it to a third player for a huge margin.

Thirdly, the arrangement made sense because the proposed deal contained provisions committing both Safaricom and Airtel to take over the 300 employees of yu.

The sticking point was, of course, the issue of Safaricom’s monopolistic position in the market: the fact that by buying some of yu’s assets, the monopoly was going to be entrenched.

We were going to end up with a duopolistic situation. But I was not too bothered about the issue of concentration of economic power, especially because the trend you see in mobile telephone markets in the world today is that of consolidation.

To me, it does not make sense to dogmatically insist that this market needs more players when two of them have just collapsed.

I now gather that the proposal by Safaricom, Airtel and yu no longer has the support of most of the decision makers within government.

The new kid on the block is a Nigerian outfit by the name Megatech Engineering Ltd, represented by a certain Alhaji (Dr) Abubakar Aliya Abubakar. Whether he will succeed where the Indians and French failed remains to be seen.

As we went to press, Safaricom was said to be mulling over its next move. Is there, really, room for more profitable players?

Granted, Safaricom has been turning handsome profits year in year out. But if you look at the statistics over a long period of time, you will realise that since 2011, the numbers have not been impressive.

LOW GROWTH POTENTIAL

For example, mobile penetration has remained flat. Even more telling, revenues have been stagnant. We have an environment where weaker players are forced to either cancel or postpone most of the capital expenditure.

A just-concluded study of the Kenya mobile telephone market by top audit firm Ernst & Young makes very revealing observations.

First, that given the low growth potential in the mobile sector, foreign investors are beginning to find countries like South Africa and Nigeria to be better bets than Kenya.

Secondly, lower capital investment in network and capacity coverage is causing Kenya to lag behind other African economies.

Third, that the slowdown in capital expenditure in the mobile telephone industry is responsible for poor quality of service.

Fourth, that the Kenyan market is characterised by high competition, poor growth and low profitability.

I don’t agree with some of the conclusions of this study, but when you have two major foreign investors pulling out of the scene, leaving behind bankrupt companies, you have have to change policy.

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