Goodbye Safaricom?

Major battle for Kenyan cell phone subscribers shapes up
Even as the great battle for Kenyan voters begins to take shape, another phenomenal war albeit this time on the business front was launched yesterday by Kenya’s previously sleepy mobile phone services provider Zain Kenya.

In a shock move, the company reduced call tariffs to Kshs 3 per minute across all networks and Kshs 1 for SMS messages across all networks.

Safaricom’s Michael Joseph tried hard to look composed but there was no doubt that he was badly shaken even as he assured the press that such low rates were unsustainable. But when pushed by shrewd and alert business journalists, he admitted that the move by Zain was headed in precisely the right direction for any company looking to win market share in the Kenyan situation.

To a casual observer who is unaware of the latest developments at Zain the latest move may look like more confusion at Zain. More so when one considers that only last year, the company registered a loss, largely attributed to its low cross-network tariff campaign, Vuka. The campaign pulled its average revenue per user (ARPU) to record lows of $6 (Sh462) down from $7 (Sh539) in 2007 but failed to bring in a significant amount of new subscribers or increased use and thus revenues. Net losses increased to Sh6.9 billion from Sh1.67 billion in 2007 on lower revenues and increased administrative costs mainly due to costs related to network expansion

However a closer examination reveals that the main hand behind the latest dramatic price reductions at Zain is the new Indian owner Bharti Airtel. Those who have visited India or understand how business is done in that country will quickly realize that Safaricom has a lot to worry about this time round. India is the only country I know in the world where numerous enterprises thrive on margins of 5 per cent or less. I kid you not. Indian entrepreneurs have learnt how to make their profits by going for extremely high volumes. Contrast that to the Kenyan situation where no serious business person wants to consider profit margins below 200 per cent or thereabouts.

There is no doubt that the words of Zain CEO Rene Meza yesterday must have sent a chill down several spines at Safaricom headquarters in Westalnds. He said; "The tariff is not an offer, but a value proposition, which will make mobile services affordable."

This blog has been accused of giving too much credit to Safaricom’s Michael Jospeph and making him look like a business genius of sorts and in a way Mr Joseph has had it very easy thus far. He arrived in Kenya to find an aging Kencell (previous name for Zain) managing director whose understanding of competitive marketing was wanting. Joseph proceeded to take over the market with a clever per second billing campaign that gave the illusion of reduced call charges just because he was billing per second. Kencell stuck to their per minute billing system and only changed when it was too late and the damage had been done. In this way Joseph was able to charge higher and still take over the market from his hapless competitors. What this meant is that he was also able to quickly build a war chest for marketing while stealing market share at the same time and the rest as they say is history. It was a fascinating albeit one-sided battle. At one point the then sleepy Kencell managing director Philipe Vandebrouck told Kenyans that his call rates were akin to buying a whole bottle of wine at a restaurant which is always cheaper than being charged per glassful (which is what Safaricom were doing). He was telling this to the vast majority of Kenyans who have never been to a smart restaurant let alone ordered a bottle of wine. Wananchi accustomed to dirty dingy kiosks wondered what the old mzungu was talking about and continued to troop in large numbers to Safaricom.

Now in Bharti Airtel, Safaricom have for the first time a serious competitor to match their wits with. Sadly Michael Joseph has already announced his exit later this year as Managing director at Safaricom although he will continue to sit on the board and play a crucial advisory role. Just as well because I see a serious exodus of subscribers to Zain in the coming weeks. The only question is if the company has the infrastructure in place to sustain reasonable service in the wake of a sudden surge in the use of its’ network. Whatever happens the next few months should be very interesting and a great time for budding entrepreneurs to watch and learn.

For those ineterested in entrepreneurship this discussion on Entrepreneurship in India reveals some of the problems and helps foster a deeper understanding of the current situation on the ground.