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The opening up of competition in Kenya has re-ignited interest in what might otherwise have been a slowing market and it offers clues to what might happen when wider competition is introduced in other markets in Africa. Just back from a recent trip there, Russell Southwood seeks to highlight significant emerging trends.

Three things seem to be having a strong impact on the Kenyan Internet market: the vigorous promotion of the local call internet number 9444 by Telkom Kenya’s new subsidiary Jambo Telecom; the opening shots in the new broadband service war; and the inclusion of VoIP services in the revised ISP licences.

These three things seem to be causing the market to separate out more clearly into corporate and residential players and to be bringing about the much anticipated consolidation. Wananchi’s merger with ISPKenya may be just the start of the process. One sign of the mood of the market is that the merged company has been approached by several other players wishing to join the nuptials.

If Wananchi can hold on to the subscribers of ISPKenya, it will have a 38% share of the market, making it along with Africa Online the largest residential player in the market. Both NairobiNet and SkyWeb Technologies (see story below) have been looking at the call centre market and the latter has started work in that area. The reason? The stagnation of the dial-up market and the coming impact of broadband and VoIP on the shape of the market.

The corporate market is somewhere between 1500 and 2000 leased line customers. About 30% of these customers are large national companies or multinationals with the balance being small and medium-sized enterprises (SMEs). There are three main private players in this space: AccessKenya, Swift Kenya (owned by the Murali Group which also owns KDN) and UUNet Kenya. For example, at last count UUNet Kenya had around 700 leased line customers, while a smaller player like Interconnect has 250 customers. All the residential players have some element of corporate business but the numbers are in the tens: for example, SkyWeb Technologies has 40 leased line customers.

The move to include VoIP in the revised ISP licences give some idea of the consolidation taking place. Last week we reported that eight licences had been issued and the regulator expects to see that total go up to around 20. Previously, there were 79 licence-holders for the old-style licence. The new licence gives the regulator the right to inspect the equipment being used by the ISP for VoIP and the industry harbours suspicions that this may be used to block some players. The legalisation of VoIP has left a number of ISPs floundering in strategic terms. Many simply do not have the skills to get into the IP voice business and as a result will either need to find a clear niche for themselves or get left behind.

The impact of VoIP has begun to transform international call rates and will continue to do so. As one industry player told us:”It will revolutionise how people do business in Kenya. Why should a customer spend 90 cents a minute to call Europe or the USA when Telkom Kenya is making 75-80 cents from that call? If you’re a bigger corporate spending US$5,000 a month on telecoms, this will come down to US$7-800 a month. It will be a big shot in the arm for our struggling export industries in terms of competitiveness.” ISPs calculate that they will come into the market with both corporate and individual user voice products that will offer international calls to major destinations at between KS7-10 a minute.

Seeking to fight fire with fire, Telkom Kenya is using its Huawei VoIP gateway to offer a pre-paid, calling card service at US0.15 cents a minute to most major international destinations. This service is aimed at the individual customer who has largely deserted the incumbent for grey market cyber-cafes. However, the grey market has responded by offering prices as low as KS5 (US0.03.75 cents) a minute so the price pressure on the incumbent is unlikely to relent. Also the mobile companies are themselves likely to offer a similar VoIP service for international calls but interconnect rates are making such a prospect rather slow-moving. As ever in these discussions, Telkom Kenya holds most of the strategic “high-ground”.

Safaricom has been placing large ads pointing out to people that if they receive international calls from local numbers or with no identifier that these are “illegal” grey market calls and they should report them to the company. Apparently there has been an increased volume of very low quality calls going through the grey market to mobile users.

But as one industry insider told us:”Everybody knows the large grey market VoIP operations are being run by ‘influential’ people and (the regulator) CCK is not stopping them.” So who are these ‘influential’ people? “People who have connections to the politicians.” The regulator’s response is that Telkom Kenya has an Anti-Fraud Department and this deals with “illegal” operations of this kind.

The 9444 service which offers internet access for the cost of a local call is now being promoted heavily by Jambo Telecom, a newly created Telkom Kenya subsidiary, which it is claimed will have a separate board and be an unsubsidised, separate profit centre. It will combine the 9444 dial-up, the broadband offering and the VoIP service described above. It is clearly a strategy to retrieve something workable from the somewhat “competition shell-shocked” JamboNet.

In a market as price conscious as Kenya, a more widely promoted 9444 service is bound to hit the dial-up market. Customers may not be aware that they will get little service support but may trade lack of support for the cost of a local call. Sadly the negotiations to make this service available to all ISPs equally broke down. So Jambo Telecom is almost certainly offering predatory pricing and this and the recent broadband pricing have both been challenged by the industry association, TESPOK.

Luckily for Kenyan ISPs, the current broadband pricing – predatory or not – is so high that it is currently a corporate niche product for SOHO users. The US$170 entry level product would only really be of interest to a very affluent individual customer but it will eat into the SME end of the corporate market once download capacities are increased, as they surely will be.

Current broadband speeds – although an improvement on dial-up – would not be recognised as broadband elsewhere. However capacity increases may not also be accompanied by significant price falls until the EASSy fibre cable is in place in 2007/8. Numbers of DSL subscriptions sold are in the hundreds: for example, Interconnect has 150 subscribers. As elsewhere in the world, the service has been plagued by installation problems as there have not been enough trained installers.

Furthermore the company has not been publishing its contention ratios: it is probably in the region of 10/15:1 although it can go considerably above that during busy parts of the day. Also it was providing less bandwidth when it launched than it currently is. Although when challenged on the lack of published contention ratios during a meeting on research on consumers in the Internet and telecoms sectors held by IDRC last week, Jambo Telecom’s newly appointed Head of Marketing Ahmed Musa assured us that it would do so before too long. An industry player told us:”We have a 32k downlink customer who tested the service and found it slower than his existing service.”

Those ISPs not able to resell the Telkom Kenya broadband service are suspicious that the company is pursuing a “divide-and-rule” approach to the ISP sector. Those who have been appointed – Interconnect and Wananchi – feel that the company was simply trying to limit the fall-out from its initial lack of installer skills and say that all will get a chance to resell once these issues are resolved.

For the newly legalised VoIP market to work effectively, there will need to be equitable, cost-based interconnection agreements and easy access to numbers. One player told us that it had applied to the Telkom Kenya 90 days ago for interconnection but had received no reply. It had also had a similar discussion with mobile operators but had been told that discussions could not begin until its licence had received final approval. The regulator is receiving applications for numbers but the issuing of them depends on judgements made about network size after the mandatory inspection. So there will be plenty of grounds for time-consuming arguments that allow Telkom Kenya to continue to exercise dominant market power in key markets.

Furthermore the whole interconnect issue may get caught up in “study stasis”.One has recently received CCK board approval to look at mobile and fixed prices. Whilst this is being dressed up by CCK as a look at whether consumers are getting good value, it is actually simply an interconnect study. Some operators claim that they are being “punished” by the current interconnect regime.

The most notable of these victims is Telkom Kenya which has large, outstanding interconnect debts but it is not the only unhappy party. CCK CEO John Waweru says:”We want to run the current interconnection regime against international benchmarks and see whether we are out of line”.

An equitable interconnection agreement will begin to put price pressure on the national backhaul and local loop segments of the traffic in much the same way that competition at the international level has done so.

But CCK CEO Waweru noted:”Since the mobile companies came into being, there have been no price reductions and there are high charges for calling outside the user’s chosen network. It forces people to keep two cell phones.”

There has been talk of licensing a fourth mobile operator as the third, Econet is still in the courts a year after its licence was awarded. But Waweru maintains:”There is nothing I can do until the case is resolved. I have no power to cancel the licence. It was a board decision. But there are conditions and if you find the licence holder does not meet those conditions, it can be cancelled.”

The regulator has seen that many companies have sought to operate a series of different licences concurrently through separate but linked companies and has announced its intention to consolidate these different licences into a single licence. These include: the Public Data Network Operator licence, the local loop licence, the Internet backbone gateway operator and the commercial VSAT licence. Broadly speaking, the industry is happy with these changes and as the 60 day notice period expired a week ago, the regulator will make the change once it has completed the terms and conditions of the new licence.