Kenya: Zain falls out with Safaricom over interconnect as price war gets dirty


In an aggressive statement, Zain have accused Safaricom of sabotage after their request for a capacity increase on the Safaricom-owned interconnect link – necessary as Zain experienced congestion following its tariff launch – was not accommodated overnight.

On Monday, 16 August 2010, the Communications Commission of Kenya (CCK) ordered a reduction in interconnect charges from KES4.42 to KES2.21. Just a day later, Zain Kenya followed with the announcement of a more than 50% reduction in their tariffs, bring both on-net and off-net charges down to KES3, and text messages to KES1. These are presently the lowest tariffs in the market, and  not surprisingly subscribers responded enthusiastically.

Twitter had it first: rumours that Safaricom had blocked calls and sms from Zain to its network. Not so, argued Safaricom CEO Michael Joseph: Zain’s network was simply congested after the launch of the new Zain tariff. In fact, Zain had contacted Safaricom staff at 7pm on Wednesday, asking for an increase of capacity on the interconnect link owned by Safaricom as their own link from Zain was at full capacity. Safaricom staff promised to initiate the necessary measures in the morning as they would have to clear this with their management first. Michael Joseph explained that he then personally received messages from Zain management at 10pm pushing for the capacity increase, and again reiterated his promise to address this in the morning.

Zain, however, moved quickly to accuse Safaricom of sabotage in an aggressively worded press release, stating that they had written to CCK to demand that Safaricom be declared a dominant operator, and its alleged refusal to accommodate Zain’s request for capacity expansion be declared an abuse of dominance. And it is here where the explanation lies:

Safaricom had been highly critical of the new tariff regulations that would declare the company a dominant operator, a status that effectively subjects the operator to price controls: A dominant operator is required to inform CCK of, and obtain clearance, of any tariff changes 90 days in advance. In the drafting process, Safaricom had raised their concerns with CCK that the regulations did not define what qualified as abuse and how it would be investigated. Despite reassurances from the CCK, this issue had not been addressed in the version finally gazetted.

After sustained pressure, the implementation of these regulations has recently been suspended, and the CCK had agreed to a revision of the regulations by international experts. And this is what Zain’s push will aim at: to force the CCK to declare Safaricom a dominant operator and then enforce the regulations, i.e. Safaricom would only be able to Zain’s tariff changes after a quarter of a year at the earliest.

It is curious that Zain should only request the capacity increase on the evening of the first day of the new tariff: As an experienced network operator, the company must have anticipated the congestion on their network following the announcement, and should have planned for this. Since the protocol governing such reciprocal capacity increase allows for up to seven days for the implementation – a fact that Zain are aware of since it is part of the contractual agreement between both companies -, it appears strange to attempt this with frantic evening calls and then claim that Safaricom were unwilling to move on the request.

The knives are clearly out in the battle for market share. But alongside the general question of whether Bharti will be able to transfer their business model to Africa, their latest tariff reduction also raises the question again how sustainable such price wars are – how low can you go? To make tiny margins work, an operator needs numbers. Orange and Yu have spent extensively already on trying to create a footprint in the market. And with their mobile money service M-PESA, Safaricom have created a stickiness product for their subscribers.

Safaricom is also a wildly profitable company, which enabled it to invest in infrastructure and other non-voice services, including most recently data services for broadcasters, creating additional revenues. The other three, in contrast, have struggled to gain market share. Zain may have found more financial oomph through the Bharti investment, but Essar’s Yu had initially reacted cautiously to the tariff reduction, and Orange have shown disappointing subscriber and financial data recently despite having won some government concessions after a lengthy dispute over ‘missing assets’ If anyone can sit this out, it’s Safaricom – but can the other two?