He built Sh250bn empire from scratch

There is a feeling that after a decade of turning around a bleeding and a much hated State-owned company into one of Africa’s most admired and most valued mobile phone company, Michael Joseph would be all too happy to show off his achievements now that he is retiring.

Safaricom today is Africa’s eighth largest publicly listed telephone company valued at Sh250 billion on the Nairobi Stock Exchange.

Last year it generated Sh81 billion — and made Sh20 billion in net profits, from almost nothing a decade ago. By 2012, analysts at African Alliance expected Safaricom to make Sh100 billion selling mobile phone airtime and data through Internet connections and through its popular money transfer service, M-Pesa.

Beyond making money, Safaricom has a big influence over the most important facet of the Kenyan life — communication and financial services to the masses —because it connects eight of every 10 Kenyans that own a phone, or 20 million people.

This makes Mr Joseph one of the most influential businessmen in country.

This kind of madness

But today, as we sit in a small conference room at Safaricom House with him across the table under the watchful gaze and good-natured image-handler Washington Akumu, Mr Joseph is livid about an SMS alert that has come through the Safaricom network informing subscribers that a careless driver has crashed a matatu and killed most of the commuters.

“I have a solution for this kind of madness,” a resigned Mr Joseph says. “If I was the head of the police I would make the driver pay for his crime on the spot.”

For a man with a liberal bent, he knows that careless driving will not be solved by firing squad type public executions, but his frustration captures the very essence of what holds the country back.

This is Kenyans’ natural instinct to cut corners or even break the laws meant to protect them or facilitate public service.

When I ask him later what his dreams would be after retiring or whether he would write a book about his experiences building Safaricom.

“I would like to be a member of Parliament and make sure this sort of thing does not happen,” he says. “If I had my way, I would not be as public as I am. Washington would like me to be more controlled. Inside I am a very private person.”

Mr Joseph is not a citizen and has not shown inclination to run for public office, but at heart his politics make him sounds like a natural born Kenya.

Born in South Africa, Mr Joseph, as a small boy, dreamed of becoming a game ranger or a veterinary doctor, but as his ambition grew, he ended up as a telephone repairman as a teenager in his home country. He graduated with a degree in electrical engineering from the University of Cape Town.

“I started working when I was 17 years and I had no idea I would end up where I am,” he says. “Life is an upward spiral. I grew up wanting to be a game ranger or a vet.”

When he graduated from high school, his family did not have enough money to send him straight to university so he got into a technical school and ended up repairing phones for Telkom SA as an apprentice.

He would soon complete the compulsory army service for three years before joining engineering school. In 1986, he left South Africa at the height of the anti-apartheid campaign and went to the US to “start again”.

He worked for GTE, a mobile phone operator for 10 years starting at the bottom in the international projects team and rising to vice-president level. He joined Vodafone in Hungary as chief technical officer in late 1999 after working as a private consultant for two years and joined Safaricom in 2000.

His succession at Safaricom was expected to be drawn out with local managers jockeying for the position, but it turned out to be smooth after Vodafone announced recently that its executive, Mr Robert Collymore, a long time Safaricom board member would succeed Mr Joseph.

As for the acerbic comments, that is Michael for you, the straight-up-talking and shoot-from-the-hip engineer that employees, business associates and journalists see in private and a total contrast from the well rehearsed, but shy corporate chieftain that the public see.

While Mr Joseph was bemoaning the pressures on his network in the now famous quip about “Kenyans curious calling habits”, Kencell, which had entered the market harping on the antipathy that Kenyans held for Telkom Kenya — the inefficient and corrupt State-owned telephone company and the parent company that still owned 60 per cent of Safaricom until 2007, had installed the best network from the scratch.

As it turned out, Mr Joseph did not tell Kenyans that he did not have a lot of cash to blow on base stations. In 2000 when he was hired as an independent consultant with four other expatriates by Vodafone to set up its Kenyan operation with only $20 million of start-up capital he was meant to run a very tight operation.

After all, it was estimated that there were only 50,000 people who could afford mobile phones, and Safaricom already had 20,000 and Kencell had quickly snapped up 20,000 corporate subscribers.

In 2001, the global capital markets would soon dry up after the March 2001 tech crash on Wall Street which made it difficult for companies like Vodafone and eventually Kencell’s parent company Vivendi to raise money to fund expansion into poor African countries. Safaricom had also been reincarnated into a terrible marriage with Telkom Kenya.

In these circumstances, Mr Joseph and his team as they raced to roll out Safaricom had little cash to play with and instead turned on lessons learnt from his mistakes launching the Hungarian operation for Vodafone as a guiding light in the Kenyan market.

“We had to make decisions that made sense based on previous experience, knowledge, gut feeling and luck,” says Mr Joseph. “In retrospect we made the right decisions, but no one knew at the time whether they were right or wrong, but in seven of our 10 of them we were doing well.”

“In Hungary, we entered the market as the third operator,” says Mr Joseph, “I wasn’t in charge and we did not make the right decisions because our strategy was to copy our competitor.” It did not work well.

In 1999, following such a strategy would have meant following Kencell and drawn a lot of blood in shark-infested waters fighting for big corporate customers and rich businessmen. Kencell had already snared this market, grabbing a lot of Safaricom customers who had bought brick sized phones mostly at Sh240,000 a pop.

Now Kencell was selling a phone at around Sh20,000 and a relatively modest subscription fee and was already crowing about being the market leader. At the time, getting a subscription was painful process almost as difficult as getting a national identity card and one had to demonstrate they had a good credit history to open a post-paid account.

Buy the airtime

Inspired by breakthroughs in South Africa where MTN was reporting success selling phones to poor workers using pre-paid calling card, or scratch cards, Safaricom took an opposite strategy.

At the stroke of midnight — and amid much excitement at the ushering of a new millennium -- Safaricom launched three innovations that would blind Kencell and prove fortuitous in the mobile wars.

First, Kenyans would get phones at less than Sh10,000, second, they did not need to have post-paid accounts because they could now buy the airtime that fit their budgets using scratch cards.

Finally, bucking the trend where Kenyans were charged a minimum of three minutes worth of airtime for a call that lasted even two seconds —and for a minute worth in Kencell — Safaricom’s customers would pay for only the time they used measured in seconds. Subscribers would also access customer care for free at time when Kencell was charging for the service.

The battle for customers over the next two years was fought over whether customers preferred to pay per second or per minute or whether a cheaper congested network was better than a crystal clear, but an expensive one.

By 2005, when Safaricom commanded 60 per cent market share and three million customers the picture of customers climbing trees to get clear reception over their lines, it was clear that the war would be won through pricing.

However, what set Safaricom apart is not its pricing policy, but its grasp of modern marketing. In the early days, Mr Joseph tells a comical story of how the company had hired Ogilvy & Mather, the WPP owned advertising firm to design its communications. As is typical of advertising firms, Ogilvy approached the communication strategy with fancy models, which baffled Mr Joseph’s simple, engineering style.

Soon, all this was stripped down to simple and unsophicated logo with a swish over its name that played to Telkom’s corporate colour, green, which also features on the national flag.

The brand positioning statement would be the modest “Better Option” which contrasted with Kencell’s boisterous “Yes”. Safaricom did not want to give a false promise it was the best network, but it promised self-improvement at the time Kenyans were facing major economic hardships.

“At the time I did not know whether this was the right decision, but green turned out to be the right idea [that played to a nationalistic sentiment],” he says.

With this strategy, Safaricom upended the traditional model which expects a business to succeed merely because it has built and is selling what business school professors and markets call “the better mousetrap”. In this case, Safaricom understood what customers wanted and were willing to pay, than the best product they could not afford.

It is this uncanny sense of understanding what ordinary Kenyans really want and then delight them with good service that has worked well for the company and that continues to define its services and marketing communication.

This saw the introduction of innovative services such as lower denomination scratch cards selling for Sh100 and Sh50 (Bamba 50) and “Sambaza” a service that allowed friends and relatives to share phone credit through text messages.

Eight million customers

In 2007, Safaricom stormed the market with a revolutionary mobile money transfer service that would help sign up eight million customers.

Today, M-Pesa is a globally celebrated innovation that has put Kenya on the map as a hub for mobile innovation. Mr Joseph says that M-Pesa, which helps Kenyans to pay for goods and services as well as send and receive cash over their mobiles is now handling Sh1 billion ($15 million) daily.

Its potential is enormous and restricted to Central Bank of Kenya’s risk management strategy which does not want the service to exceed more than five per cent of the transactions conducted in the national payment system, mainly by commercial banks. Three months ago, M-Pesa was extended to link mobile cash to bank accounts.

Safaricom’s success has however not been celebrated by its rivals who now all share 20 per cent of the market and they continue making billions of shillings in losses. They mostly blame Safaricom for their woes because with its 18 million customers, it means that majority of calls initiated or terminated in Kenya are made on its network.

This means Safaricom makes Sh4.50 from each of these calls. Some of the rivals have lost a lot of money waging a price war with calls priced either at zero or below this interconnection fee, which mean they lose money. Mr Joseph defends Safaricom saying it had not tried to kill competition because it prices its cheapest calls at Sh6.50, but could easily charge Sh1 and wipe out everyone.

Awesome power

Safaricom faced a similar challenge — and made a lot of noise -- when it started at a time Telkom Kenya was a monopoly and charged Sh28 for interconnection and later dropped this to Sh22.50. This meant that Safaricom and Kencell had to price their calls between Sh40 and Sh50.
With competitors becoming more aggressive, Safaricom is also being forced to innovate to stay ahead of the game.

Two years ago, when France Telecom bought Telkom Kenya and launched Orange mobile phone, Safaricom saw a major threat and decided to expand aggressively into data market, where it wants to make money selling internet connections. This is one market where it has proved the awesome power of its cash generating machine.

Last year, the company started an aggressive campaign to sell cheap computers to increase the number of customers who can buy data services. Today, the company has sold nearly one million cheap laptop computers unsettling multinationals that dominated the market. Safaricom wants to reshape the future of communication and media in Kenya.

So, as Mr Joseph heads for the exit, it appears that the key and unsung lesson from his experience is the power of humility in business to work with limited resource and understanding your customers to satisfy them with the right products.