Consolidation in Kenyan ISP sector

Internet

The Kenyan ISP sector is consolidating, with many companies buying up their competitors and new foreign owners entering the market. Pressure on margins from the switch to DSL broadband has been one of the key drivers of consolidation.

Gateway Online, ISP Kenya and Net2000 were a few of the casualties of the consolidation movement taking place in the market, with most of them either running out of steam in the rapidly competitive market or being bought by larger Kenyan operations.

And then, late last year, the buying started again. This time, the bigger boys who managed to survive the rout of the earlier buying spree were the target, and the buyers were not Kenyan. In 2006, a South African firm acquired a controlling stake in Interconnect, a local Internet service provider.

As part of the deal, IS injected Sh300 million in fresh capital in to the ISP. "There was no way we could have continued on our own. For many Kenyan grown ISPs, getting access to cheap bandwith and financing makes it harder to survive in the market," said Tejpal Bedi, Managing Director of IS Kenya. Much of the investment, Sh100 million, was set aside to upgrade systems.

The company planned to roll-out new technologies and services, hoping to maintain its share of the corporate market by offering cost effective virtual private networks to organisations. "The only way we could maintain our market was by partnering with the South Africans and diversifying our product line, which costs money," said Mr Bedi. The acquisition was touted as part of the South African company's growth strategy to gain a footprint in the local and the greater Eastern and Central African market.

"We will ensure the product mix is right for the Kenyan market, by deploying our proven services in Kenya," said IS business development director Ermano Quartero, at a function to announce the deal.

The company that bought Bedi's company is one of the leading converged communications service providers in South Africa, boasting a client base at the time of the Interconnect aquisition that included 80 per cent of South Africa's top 250 listed companies.

A few months later, the industry was abuzz with the biggest acquisition yet. The target was Africa Online, one of the largest ISPs in sub-Saharan Africa - and the South Africans were after it again. Telkom South Africa eventually won what was an acrimonious battle for the Kenyan-born company.

"With the decline of the voice market we are extending and defending our core profitable services. This acquisition fits that objective," said Africa Online's new Chief Executive Officer John Joseph.

Telkom SA has plans to invest Sh300 billion over the next five years in projects aimed at gaining the company a foothold in key African markets.

Formerly the giant of the Kenyan ISP industry, the South Africans took on a company that was cash-strapped and had struggled with periods of losses over the last few years under it ownership by London firm African Lakes.

The situation may get worse for the few small ISPs still fighting for market share. Smaller ISPs have traditionally been dial-up providers, an industry currently being affected by a shift in consumer preference. Although over 50 per cent of users still use dial-up access, use of the service is estimated to be decreasing by 30 per cent while mobile and wireless Internet access is increasing by 40 per cent annually.

Up from just under 4,000 users in 1996, Kenya's Internet market grew by its largest margins last year, and now includes 200,000 users. The cost of international bandwidth, still expensive and accounting for most of ISPs' operating costs, has largely limited more rapid growth.

Business Daily

Correction: Our apologies to Nairobinet who were listed as one of the casualties of the consolidation in the Kenyan ISP sector. They are alive and kicking and can in no way be described as a casualty.