Mobile Telephony

What Next for Airtel after failed JV Attempt with Telkom Kenya?

With Safaricom dominating the mobile services sector by commanding a 65% market share compared to Airtel Kenya’s 24.6% and Telkom’s 6.7%, the latter two saw it fit to form a Joint Venture (JV) and join forces in trying to erode Safaricom’s market share. They intended to do this by taking advantage of synergies derived from the JV. These include Telkom’s history as the incumbent operator and owning a lot of infrastructure and real estate, Airtel Kenya’s parent company’s experience in running successful mobile networks and services and finally, both parties customer bases.

In this JV under the name Airtel-Telkom (missed opportunity to name it AirT&T ūüôā ) , it was planned that Airtel would run the mobile business as Telkom focuses on Digital Services to the enterprise. However this was not to be as in August 2020, Telkom issued a statement saying they were no longer pursuing the JV transaction as they saw it fit to change their strategy. This announcement came some months after the regulator; Communications Authority of Kenya gave new conditions for them to give the JV a green light. These conditions included that none of the parties can enter into any other sale/merger/buy-out in the next 5 years. Other conditions included that Telkom relinquishes its 900 MHz and 1800MHz RF real-estate back to the government upon the expiry of license term because Airtel was the one now to offer mobile services and it has more than enough RF spectrum to serve their merged customer base four-times over. The two were also expected to honor any existing obligations to the government such as paying for their operating license and spectrum fees.

As you would imagine, these new conditions made it very difficult for the JV to make any business sense. It put Telkom at a disadvantage and made the JV unprofitable. Many saw Safaricom’s hand on these new conditions but I beg to side with the regulator here because:

  1. With Airtel running the mobile side of things in the JV, they have enough spectrum to serve both their customers and Telkom’s customers. The two will therefore be sitting on a lot of premium RF real estate yet they lack the customer numbers to utilize it efficiently. The JV according to the regulator was resulting in inefficient use of RF spectrum. One of the regulator mandate is to ensure efficient use of spectrum as a scare resource. This is why they asked Telkom to hand back to the regulator RF allocated to them in the 900 and 1800Mhz bands once their existing license expires if they went ahead with the JV.
  2. A JV does not create a new legal entity that is capable of becoming a licensee by the regulator. Both firms were therefore expected to meet their obligations individually. These include license fees payment, filling of returns to the regulator and other bodies and Quality of Service measurement.

With the JV now off the table and Telkom already announcing its new strategic direction, what’s next for Airtel?

Why is Airtel Here in the First Place?

The many mergers and acquisitions that led to Airtel Kenya aside, one of the cardinal mistakes that its predecessors made was failing to connect with the ordinary Kenyan. Kencell Communications, the first licensed mobile operator was the predecessor to Airtel today. They entered the market with per-minute billing which was at the time 35 shillings a minute, a call lasting one second or 60 seconds cost the same on their network. This was not very subscriber friendly. Enter the second mobile operator Safaricom who introduced per-second billing and this model was an instant hit with the nascent market. With Safaricom becoming the ordinary persons preferred network due to per-second billing, Kencell decided to focus its energies on the business sector by selling heir services to corporates. Unbeknownst to them at that time, the mobile market turned out to be a largely mass market one with individual users massively outnumbering corporates as the customers. With this early lesson, Safaricom learned to speak the ordinary citizens language and managed to connect with them in a way Kencell could only dream of. For example, unlike Airtel, Safaricom’s products and marketing were predominantly in Swahili. In fact all Safaricom products to-date have a Swahili name or origin. Failure to connect with the customer at a personal level by Kencell and its subsequent brands/owners is largely responsible for Airtel Kenya’s situation today as Safaricom’s product names have become verbs and nouns in the common citizens daily speak.

I however think that all is not lost for Airtel. If you look at Safaricom’s financial results, their profit and revenue contribution from new services such as Internet, enterprise connectivity, fiber to the home is on the rise while that from voice is not growing as fast. With this in mind, Airtel has the opportunity to reinvent itself as more than a mobile operator. It has the tools and resources to transform itself from simply being viewed as a mobile operator to a Digital Services Provider and Integrator. There is an increasing drive towards digital economy with many businesses going online and depending on connectivity and the cloud. Homes are also getting connected to the Internet and this is driving digital content consumption. This is the space in Airtel needs to play in. The recent launch of Airtel TV is a step in the right direction and should not stop there. Airtel’s dalliance in the African art scene through sponsorships in the past has also put them at a premier position to be a leading content generator in the country. If Royal Media Services with their relatively shallower pockets made Viusasa work, why can’t Airtel?

Another area is the provision of digital services to corporates. Liquid Telecom partnered with Microsoft as Safaricom partnered with Amazon to offer hyperscale computing to the market. GCP, AliCloud are all potential hyperscale computing players that Airtel can partner with to target the corporate market.

Airtel has an immense opportunity to become a leader in digital services and content if it first stops seeing itself as a mobile operator (and therefore stop competing with Safaricom or Telkom) and moving fast to capture this emerging market and become the go to provider for Artificial Intelligence/Machine Learning, Cloud Computing and content delivery. The recent investment by Facebook into Reliance-Jio in India is indicative of what progressive mobile operators need to do to remain in business. The Facebook investment infuses into the telco, a new way of thinking about how value can be delivered to consumers.

ICT and Telecoms, Mobile Telephony, Regulation and Law

The Dominance Debate Should Be About The Consumer’s Welfare, Not Operators

Communication TowerDuring the last Safaricom AGM, the dominance debate came up and all contributors to the discussion at the meeting seemed to agree on one  thing: That the regulator is punishing Safaricom for being successful and that it was not their fault that their competitors have refused to invest and innovate. The recent calls by their competitors to the regulator to have them declared dominant and abusing their dominance are based on a market study report released last year by a consultant. This report found Safaricom to be dominant in both the mobile communication and mobile money markets. The report went further to suggest remedies that include infrastructure sharing, retail tariff controls and the splitting of the company into several independently run companies for mobile money and mobile communications.

In July this year, the parliamentary committee on ICT’s met sector players on the issue of dominance and what came out was other operators still strongly feel that they cannot be able to compete with Safaricom on equal footing. On the other hand the committee members felt that the operators are not doing enough to pry off Safaricom’s grip on the sector. Recent reports also indicate that the regulator is also under pressure to declare Safaricom dominant and in abuse of its dominance. By going ahead and doing so, the operator will not have a free hand in the determination and introduction of new products and services in the market without the regulators direct approval. Another recommendation that is being pushed is the sharing of both active and passive infrastructure by Safaricom with its direct competitors.

A point to note on the above is in all this discussion, no one is looking at the possible effects the implementation of these recommendations will have on the most important person in this debate; the consumer. The focus is mostly on the operators commercial welfare. Also, should the regulator decide to go ahead and implement the recommendations, what laws or framework will be applied? Are the laws also relevant to the current technological and market realities?

The Kenya Communication Act of 1998 and its subsequent amendments (Kenya Information and Communication amendment act of 2013) specify that the regulator shall from time to time develop and publish, in the Kenya Gazette, guidelines to be followed when determining whether a licensee in a dominant market position in a specific communications market. The Act also specifies that for the regulator to determine if a player is dominant, it shall prepare a dominant market power report to determine whether a licensee is dominant in a service or geographic communications markets. This is the report that was released in February this year. Based on the reports findings, the Act specifies that the regulator can declare a licensee dominant by considering the gazetted criteria, One of the critical criteria is if the operator possesses Significant Market Power (SMP).

Upon declaring an operator as dominant, the regulator will also need to show that the dominance is being abused to edge out competition from the market or to generate more profits or even offer inferior quality of service with no consequences. The criteria that can be used to check if there is abuse of dominance are as below. It’s worth noting that Safaricom meets none of the criteria below for abuse of dominance.

  1. Refusal to deal with competitors on the essential facilities doctrine: essential facility is facility supplied on a monopoly basis but is required by competitors but they cannot be reasonable duplicated by competitors for either economic or technical reasons. With new approaches or alternatives to essential facilities sharing such as VNOs and national roaming, and the fact that all mobile networks now have  a packet switched core as opposed to circuit switched, this doctrine cannot be used as a measure of dominance abuse because already Safaricom is sharing and leasing out unbundled services.
  2. Cross subsidization: This is where the dominant firm uses revenues from a market in which it is dominant to cross-subsidize the price of a service or product it provides in other markets. For example, there would be suspicion of cross-subsidization if Safaricom, when recently entering the home internet market (which Zuku was the de-facto player), offered much lower pricing than them by subsidizing home internet user pricing with revenues from their voice business. Entry prices for most markets Safaricom ventures into are often higher than competitors.
  3. Predatory pricing: This is where the dominant operator charges prices below a normal cost standard. At the moment, Safaricom prices are not the cheapest in the market so this also does not apply too. This debate would have made more sense if Safaricom was dominant through the offering of prices well below their competitors price points.
  4. Bundling of services: This is where the operator sells a product at a fairer price on condition that you also buy other services from them. For example, a user who simply wants airtime should be able to buy only airtime and not be forced to buy airtime and data though an offer despite them not having an immediate or future need for the data. If anything, its Safaricom’s competitors who are bundling services leading to wasteful accumulation of unnecessary services such as hundreds of unused SMS’s and talk time minutes that accumulate as subscribers purchase bundled data for internet access.

Innovation and Operations

There is this notion that the mobile sector is vendor driven, that the telecom equipment vendors often dictate the pace of innovation in the market. This is partly true and therefore also means that competitors in the sector have access to similar technology because the vendors in the sector supply all operators. Nokia, Huawei, Cisco, Ericsson all supply to the operators the same products. The difference however comes in on how these products are monetized. The dominance report recommends that Safaricom, upon being declared dominant should not sell services that are not replicable by the competition. This is to say, they cannot come up with a product that their competition, using their resources and infrastructure cannot come up with easily. The Kenyan ICT talent pool is very large and any operator worth their license can afford to hire the best brains in the country. The fact that all operators have equal access to technology and talent means that its not hard to replicate competitors products. But why then isn’t this happening? The answer lies in company culture. Safaricom cannot be punished for cultivating a culture of innovation as their competitors sit and wait for the regulator to give them a piece of the innovation pie. All operators have the necessary ingredients to succeed.

One business model that has been adopted by Safaricom’s competitors is outsourcing of functions. Ideally, firms are supposed to outsource their non-core functions so as to enable them focus on their core function. If its a hospital for example, it can outsource its transportation, cleaning, etc but isn’t expected to outsource core functions like diagnostics and patient care. However, many firms that adopt the outsourcing path end up over outsourcing even core functions. The reason is purely to make the financial statements look better because most of the costs will be classified as variable and not fixed costs. When a firm outsources both core and non-core functions to third parties, it loses control over quality of service and also fails to clearly see any inefficiencies in the operations.¬† The result is outsourcing will make the books look good but affect customer experience through inefficient service delivery.

What are the alternatives?

With telecommunication services now permeating all sectors of our lives, it has become a critical catalyst for socioeconomic development. drastic actions such as declaration of dominance and splitting up Safaricom will have far reaching effects on the Kenyan economy all in the name of giving it’s competitors an equal footing. So far, several regulatory actions aimed at leveling the playing field have not yielded much. First it was Mobile Number Portability (MNP) which according to analysts didn’t work well because subscribers were afraid to change operators due to M-pesa. For MNP to work, many felt that Mobile Money Interoperability (MMI) had to be in place. The regulator managed to bring all operators on the table and effect mobile money interoperability. So far since implementation, there has been no effect on the market dynamics. There are also a raft of measures put in place by the regulator to create a level playing field. Many of these measures have actually helped Safaricom’s competitors make slight gains in their market share. I believe these gains could have been more if these operators improved their operational efficiencies first.¬† Splitting Safaricom when the competitors operations are inefficient as they are will only do more harm to the sector as the supposed benefits will not be realized at that level of efficiency. The regulator in addition to playing its current role, should also demand accountability from operators on actions it takes to enable them gain market share but the operators fail to take up these opportunities. A good example is there was a very big push to effect mobile money interoperability, but when it was done, there was very little in terms of marketing this development bu those who were asking for it. At the very least there should have been a major marketing campaign that coupled MNP and MMI.

Another approach would be to offer tax breaks to Safaricom’s competitors on investment in network and services. This would lower their CAPEX on network roll out and services. Tax breaks can also be applied as a motivating factor when these operators reach certain predetermined targets. For example, if an operators revenues or market share hits a target, the government gives them a tax break. This will push them to be innovative in revenue generation and market share gaining activities.

The consumer

All the discussion around dominance has been mostly about operators gaining market share. There seems to be very little concern on the most important stakeholder: the consumer. At the end of the day the consumer should be able to make the decision on which provider to subscribe to based on the value they get. There is a general assumption that the consumer is always price driven. That all his decisions are based on price. This assumption is what has led to the many price wars we have witnessed in the market which have yielded little in terms of market share gains. Consumers buy convenience and experiences. operators who want to be successful must start looking at the consumer experience and convenience when they are on their network.

The focus of this debate should be the improvement of consumer welfare. All actions by the regulator should take into consideration the consumer, consumer welfare is the regulators biggest mandate. The best approach would be for the regulator to look at how best citizens will be served telecom services. The recommendation for Safaricom to share its infrastructure with competition can be shelved in favor of the Universal Service Fund. The USF can be used to lower the cost of rolling out services by operators in under served areas. This approach has worked very well in Latin America.

According to an analysis by the Institute of Economic Affairs (IEA), should the regulator implement the dominance report  recommendations, consumer prices for services would actually rise and not fall. This will hurt the consumer despite the fact that the leveling of the playing field for all operators is supposed to lead to lower prices. The declaration will serve the operators but not the consumer. So in the interest of the consumer, I believe other approaches listed above can be implemented, splitting Safaricom is not one of them.

Mobile Telephony, Regulation and Law

My Thoughts on the Proposed Retail Tariff Controls in Kenya

telecoms-13The Communication Authority of Kenya is mulling on introducing retail tariff controls in the Kenyan mobile telephony sector. As you would imagine, this has elicited mixed reactions depending on who you ask. This move it is said is part of a raft of recommendations by the recently released report that studied the Kenyan telecommunication competitive landscape. The introduction, according to the regulator is aimed at correcting market failures that are as a result of one operator being dominant over the rest. The proposed retail price controls aim at limiting Safaricom’s freehand in determination of loyalty schemes and promotions, prohibition of on-net discounts, mobile money fees charged to unregistered and cross-platform money transfers. Tariff¬† control is a regulatory mechanism that can be employed to correct market failures in a market. The main motivation for price control is to protect consumers‚Äô rights and interests in circumstances where market forces alone have been unable to do so.

The competitive landscape report implies that Safaricom’s price differentiation between on-net and off-net calls leads to tariff-mediated network effects. By this I mean that subscribers on a network find it cheaper to call others who are on the same network than calling people on a different network, the effect of this the emergence of the ‘club’ effect where subscribers decide which network to join based on which network the people they call mostly are on. If most of my family and friends subscribe to a network X, I am more likely to subscribe to network X because by being on network X and not on network Y, my overall calling costs will be lower due to cheaper on-net pricing. This it is argued is abuse of its dominance. But this is only true if the interconnection rates are high between Y and X meaning it will cost me more if I chose network Y where none of my relatives and friends subscribe to. As we speak, interconnection rates are already regulated by CA. This fact alone means that the regulator found and enforced an interconnection rate that was cost based and reflected the market realities. The Safaricom on-net call rates are above the regulator-set interconnection rates¬† and are similar to the rates its competition provides its customers to call into the Safaricom network, in short, Safaricom’s subscribers pay the same rate as competitors subscribers when both call another Safaricom subscriber. CA would be justified in imposing tariff controls if indeed Safaricom’s subscribers paid less to call their counterpart than when competition subscriber calls. The fact that the report found that each operator was dominant on its own network also means that the club effect can easily be replicated by competition through aggressive marketing and innovation.

Individually tailored tariffs

Another proposal by the regulator is the prohibition of individually tailored loyalty schemes and promotions. The CA 2010 Tariff regulations specify that all promotions or loyalty schemes must be approved by the regulator prior to commencement. Any promotion, offer or scheme currently in operation has the direct approval of the regulator, the details of each promotion or loyalty scheme structure were available to CA before approval and these include individually tailored schemes and promotions. When an operators behaviour due to regulation causes it to become successful, it cannot be punished for successes it encountered while operating within the laid down regulatory framework. If there is any discriminatory behaviour, then CA failed in detecting and stopping this even with the existence of regulations. When that happens, it is clear that regulation is not the solution to the perceived market failures and the only remedy is let competitive forces determine customer choice.

What would happen if call tariffs are regulated?

Most people assume tariff regulation leads to the lowering of retail rates. This would only be true if CA had a way of accurately measuring the costs involved to provide service to additional customers on their network. At the moment, due to the fact that Safaricom has invested more in network infrastructures geographical and population reach, it costs them less to bring in a new customer and provide service to them than its competitors. The proposal to use Long Run Incremental Costs (LRIC) method would mean that because of the massive economies of scale enjoyed by Safaricom owning a large network and technology convergence, the cost of offering an extra minute of termination on the network is virtually zero in the short-term and LRIC is applied to give a realistic cost over the long term. How long is ‘long term’ will determine the price point.
A regulated tariff price should imitate the prices that would have arisen in a market with effective competition, both because this provides incentives to produce the requested service at the lowest possible cost and because the operators requesting the service have the incentive to optimize their own investment decisions. In this way price controls can contribute to efficient utilization of social resources. The problem however is that LRIC works very well in legacy circuit switched networks where it was easy to link network utilization with the provision of a service (if a switched circuit is in use, it is providing a directly attributable service), in a converged environment, the relationship between network resource utilization and provision of services is not that straightforward and an LRIC model applied to it would fail to efficiently allocate costs. As networks evolve into Next Generation Networks (NGNs), LRIC approach to service cost allocation becomes inefficient and LRIC starts to resemble the Full Allocated Costing (FAC) model. The result? higher prices to the consumer.

Replicable retail tariffs

One of the recommendations by the study is that Safaricom’s Tariff must pass the ‘replicability test’.¬† In order for a product or service to be considered replicable, it must be commercially and technically capable of being replicated by Safaricom’s competitors. By this we mean that any new tariffs that Safaricom comes up with should take into consideration the capability or state of competitors infrastructure and services especially at the wholesale level. If for example, Safaricom comes up with a tariff that takes advantage of a new innovation they developed, then competition should have similar innovations on their networks or should be allowed by Safaricom to access this new innovation at wholesales prices to enable them offer similar tariffs. In order for competitors to be able to compete with Safaricom in retail markets, it is necessary for them to have access, either via their own networks or through access to Safaricom’s network, to the wholesale components that enable those retail prices to be offered. This as you can imagine will slow down the pace of innovation by Safaricom or change the main focus of innovation from the customer to competition, anytime Safaricom wants to innovate, they will think of ways through which competition will not benefit much from it as opposed to spending their time and knowledge on how the innovation will first benefit the customer.

Tower sharing

The report found that Safaricom is dominant in the tower market owning about 65% of telecommunication towers in Kenya and recommends that it shares it towers with competition. To do this effectively, Safaricom has to let a 3rd party manage the towers on its behalf. Safaricom owns its towers while competition has a mix of owned and outsourced/leased towers. With rapid advancement in technology, there is a saying in the industry that it is always cheaper to build a network tomorrow. Any new entrant or existing operator rolling out new retail services and infrastructure such as towers will do it cheaper today than those who did it in the past. See how easy it was for Finserve Africa (Equitel) to get market reach by the flick of a switch riding on an MVNO license? Older operators didn’t get to enjoy these benefits and had to put in sweat and blood to get where they are.
In the Safaricom 2017 sustainability report, the operator spent close to 10 million litres of fuel and about KES 48,000 per month per tower location on energy costs. The report also shows that fuel and power costs are coming down and that Safaricom has also embraced green energy initiatives to power the active components at the tower stations, it is becoming cheaper by the day to setup and manage tower locations but the increase in the number of towers makes the management of the same a challenge.  Outsourcing of tower management is used by some operators to shift a large element of their fixed costs to the variable costs column of their financial books, in doing so the operators financial health improves. Tower outsourcing has little to do with improved efficiency in actual operations and management of these towers but more to do with improving the books. Due to this, the global trend in the telecom sector is the outsourcing of tower management to independent 3rd parties, something Safaricom should consider for its own benefit and not due to regulatory requirement. Safaricom should then decide to lease its towers to competition on a purely commercial basis.

Conclusion

Although well meaning, the CA needs to explore non-tariff based remedies to the perceived dominance of Safaricom. Tariff control is a very intrusive approach to handling abuse of dominance whether real or perceived. As markets evolve to become competitive, ex ante regulation should reduce as the regulator forebears regulation in favour of competitive forces. The challenge however is that customer inertia can mask the existence of competition in the market leading to the regulator applying regulatory tools to correct this perceived market failure. Market forces should be let to dictate the market tariffs.
The tariff control ocean floor is littered with shipwrecks of tariff control attempts by various countries that  tried to correct market failures by  employing it. One of these countries is Mexico who in 2012 introduced tariff controls by baring America Movil from charging interconnection fees to its competitors. Movil controls 70% of Mexico mobile market. As of 2015, mobile call charges had dropped by about 17% but investment in the sector dropped 30% during the same period, for a developing country like Kenya, a drop in ICT investments will have far reaching effects across multiple sectors of the economy. Whereas the intended outcome of tariff control is to  protect the consumer from a dominant operators actions, the question that remains is whether tariff control is the only viable market correction tool available.