Tuesday, 24 August 2010

End of Safaricom's 260m-dollar profits

This is a war that Safaricom is not likely to win!

Outgoing Safaricom CEO Michael Joseph
The Kenya's biggest mobile telephony operator has announced a cut on its calling tariff, in what seems unlikely to stem massive migration of clients to its major competitor, Zain.

Zain, recently bought by Bharti Airtel of India, last week announced the lowest calling tariff in Kenya. It lowered its call charges to three shillings per minute for voice calls and one shilling for text messages, to all networks in the country. 

The cut in calling rates followed the announcement by the Communication Commission of Kenya that it was cutting down to 2.20 shillings the amount that networks will be paying to each other for calls (interconnection fee).

Zain has a market share of about 10 per cent, while Safaricom has a giant 78 per cent share. Other operators, put together, control just under 10 per cent. Since Zain cut its charges, several subscribers started switching to Zain, either replacing their Safaricom lines or buying extra Zain lines, while awaiting to hear what Safaricom's offer would be.
Zain Logo

Now, today, on 24 August, Safaricom announced its offer to its clientele, with riders; conditions.  Its subscribers will be now call for two shillings within Safaricom, and three shillings to any other network, but with a condition that they buy credit airtime worth over 250 shillings. Beyond that, subscribers topping up airtime with less than 10 shillings will be calling for five shillings. Also, the offer announced is for up to mid-September, only. 

Such conditions will not stem a massive movement of Safaricom clients to Zain. This won't work, in a market where most mobile phone users usually top up 50 shillings.

This blog predicts that Safaricom market share will drop to less than 55 per cent in the next couple of weeks, while its share price will remain nothing above five shillings at the Nairobi bourse.

Before the current tariff review, Safaricom used to charge 12 shillings per minute for calls to other networks, while Orange charges 8 shillings. YU (Essar Telecom Kenya) has cut call charges to 3 shillings since the price wars started.

Generally speaking, mobile phone operators will experience reduced revenues and profits in the new wave of price wars, with customers benefiting the most. Zain may not expect huge revenues for now, but a sustained campaign to attract clients will work in the end. 

This is the end of Safaricom's 20bn-(260m dollars)-profits!

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