KENYA’S NEW THIRD MOBILE OPERATOR WILL FACE A TOUGH ROAD TO SUCCESS
Last week’s Kenyan High Court decision cleared the way for Econet Wireless International to take up its licence as the country’s third mobile licence operator. The Kenyan mobile market is an interesting one as it faces a number of issues of wider relevance. The market is relatively large but there must be a question as to whether it can sustain a third operator. The new entrant will need a clear commercial strategy to compete with two well-established rivals: what might that strategy be? Within a year both of the existing operators may have changed ownership and these changes are part of the broader pan-continental struggle between the bigger players. Russell Southwood investigates.
The leading mobile operator is Safaricom with 1.46 million subscribers. This figure is based on subscribers who have made a call in the last 90 days. Kencell has 1.1 million subscribers but these are defined as being those who have been active for two months and had an inactive period of no longer than three months. So there’s probably somewhere around 2-2.5 million current subscribers in the market, depending on how tightly you draw the definition.
The total population of Kenya is probably somewhere between 31-32 million. Both of the two existing players cover 60% of the population and envisage coverage growing to 70-75% in three years time. Coverage may reach 80% but that’s where it would stick because as one insider noted: "The final 20% is remote areas with not a lot of population density."
Kencell estimates that it might have 4 million subscribers by 06/07 and if market share remains broadly similar, we can estimate that Safaricom might get 5 million subscribers by that date. So how does the third operator fit into this?
Acoording to Stive Masiyiwa, CEO of Econet Wireless Group:"We believe that Kenya currently has a market of about 5 million people. We would expect to secure a third of the market over the next five years". In other words, it would be looking to secure around 1.65 million subscribers and if everybody made the numbers estimated above, there would be a total market of 10.65 million with the third operator having secured a 15% share of the enlarged market. This is probably a figure that just about fits within the envelope of the addressable market but the numbers are tight.
And as Safaricom’s CEO Michael Joseph explains he feels that he’s been here before:"I had the experience of being a third operator in Hungary with Vodafone who had significantly deeper pockets. It only got a 16% market share after a huge investment."
There’s no doubting that the cost of getting a competitive network in place will be high. On top of the USD27 million it has paid for the licence, Econet will probably need to spend between USD250-300 million on network roll-out. It cannot rely on "cherry-picking" the major markets of Nairobi and Mombassa as there are coverage requirements built into the licence. Although unlikely to start before 2005, the pay-back period (if it hits its subscriber targets) is likely to be seven years.
Much of the concern about the third licence operator has focused on its ability to raise the required finance. Econet has chosen to go into a consortium with the Kenya National Federation of Co-operatives. Its membership co-operatives are not large-scale investment vehicles but essentially savings bodies and they require the decisions of their members before they can invest. This has caused them some difficulty in raising their share of the capital. But Masiyiwa remains confident: "Our company Econet Wireless Limited (EWL) already has the capital to pay for the licence as well as to develop the business. As you may be aware Kenyan law requires that a minimum of 30% of the shareholding be held by Kenyans. Our local partners are the co-operative movement in Kenya and they are the ones who are trying to fund raise locally".
So what strategy will help them crack open the market? As Michael Joseph of Safaricom observed: "A third network operator will have to compete on service, coverage and price. We’ve spent 200 million euros on our network. Any competitor will have to do the same. Econet could take us on in niche markets but then there’s the provision of service and price."
Kencell’s CEO Philippe Vandebrouck is sceptical of its chances: "Instead of having a third operator, the Government should have asked us what we were going to do to cover remote areas. Tanzania had more operators but it has not produced better coverage and better prices."
Econet’s Masiyiwa is relying on the loyalty that might be given to an African company and its understanding of these kinds of markets: "The competitive strength of Econet is that we are an African company with a deep understanding of the African consumer. We have developed a lot of products and services aimed at addressing the needs of African consumers in a modern country like Kenya".
But Econet may be facing two companies in different ownership by the time it enters the field. Kencell is currently owned 60% by Vivendi and 40% by the Sameer Group (who also own Kenya Data Networks). Vivendi has announced its intention to sell and interest has been expressed by MTN, Mauritius Telecom and Celtel (formerly MSI). MTN has carried out due diligence but not yet concluded a deal and Vandebrouck is keen to stress that the matter is not yet settled. However a sale will be made before too long.
How does Safaricom feel about the possibility of facing its pan-continental rival MTN face-to-face? Michael Joseph does not seem too ruffled:"I wouldn’t react in any special way. In Uganda they’re market leaders. They entered into a price war and won it. It was the same in Nigeria but you’re very dependent on bandwidth for that strategy. This market is more competitive and we have the marketing wherewithal."
"I wouldn’t sit back if there was a price war but every country has its brand loyalties. Being South African-owned is a disadvantage here. South African Breweries lost against Tusker. South African operators have been successful in Tanzania and Uganda but Kenyans are loyal and nationalistic. We’re a Kenyan company and the Kenyans are very loyal. If there’s a price war we can stand up to any company who comes here."
However Safaricom may also find itself up for sale. It is currently owned 60% by Kenya Telkom and 40% by Vodafone. Until recently Vodafone’s international strategy was to take minority positions in companies outside of its core markets. But it’s now much more interested in acquiring majority stakes where it can. The drive to sell shares is likely come from the Kenyan Government who will need capital to address the considerable number of shortcomings in the Kenya Telkom network before that is privatised. It could simply sell all or part of its share to Vodafone but politically it is more likely to offer the shares to buyers on the local stock exchange.
So all of the above is probably good news for the Kenyan consumer as price will almost inevitably be one of the weapons of choice in the next two to three years.