Kenya: Safaricom aims for the big game

FROM THE ECONOMIST INTELLIGENCE UNIT

The Kenyan government is cashing in on the success of Safaricom.

Kenya's mobile phone operator Safaricom is remarkable by just about every measure. It has captured a commanding market share and a subscriber base of over 6m in a developing economy, become East Africa's most profitable business and has helped pioneer one of the world's fastest-growing mobile-banking services. It is also no stranger to controversy.

As Safaricom approaches its planned initial public offering of 25% of the government's 60% stake in the company, the company's policies have been generating many column inches in the local press. The company stands accused of maintaining artificially high prices, which can do given its commanding share of the market. To make matters worse, it's also been resisting pressure from Kenya's regulators to cut interconnection rates and to allow number portability which would make it easier for a potential rival to challenge its position.

Still, Safaricom is the rare example of a Kenyan commercial success story and an object lesson for those doubting the benefits of investing in the Kenyan economy. There's little doubt that Safaricom, backed by its British partner Vodafone, is satisfying the pent up demand for telecoms services long denied to the Kenyan population by the inefficiency of state-owned fixed-line monopoly Telkom Kenya. Aided by its strong brand identity and aggressive marketing campaigns plus Vodafone's top quality technical expertise, Safaricom has pulled well clear of its rival Celtel in terms of overall subscriber numbers and subscriber growth.

Given these two views of the company, Safaricom's up and coming IPO takes on a very different meanings. Taking the positive stance, the IPO should breathe new life into Kenya's capital markets and earn the government up to US$750m. It should also prepare the way for introduction of further competition by ending the conflict of interest posed by selling Telkom Kenya's stake in Safaricom. On the other hand, commentators in Nairobi have criticized the IPO as an opportunity for the further enrichment of a small collection of brokers and investors within the Kenyan business elite. That's because the sale has been limited by the restrictive conditions preserving Vodafone's operational control of the company, based on the British firm's agreement with the Kenyan government when it bought 40% of the company in 1999.

Innovative ways

The truth lies somewhere in between. It is true that Safaricom has had many advantages due to its privileged market position. However, the technological and marketing savvy of its UK shareholder Vodafone has also been behind a range of Safaricom's astute technological and marketing choices.

These include its early decision to focus on pre-paid customers and to charge for calls by the second, an ideal strategy in Kenya's low-income market. Another example is its innovative targeted programmes such as “Simu Ya Jamii”, which provides phones for villages whose residents cannot afford personal handsets, and its “SMS Sokoni” service, which provides daily agricultural commodity prices by text. The company also played a leading role in establishing the East African regional phone network that eliminated roaming charges for Safaricom customers for calls to neighbouring networks MTN Uganda and Vodacom Tanzania, a response to its rival Celtel's decision to eliminate roaming charges on its regional network.

Safaricom has also won praise for its M-Pesa money transfer system which enables mobile phone users to exchange payments for goods and services without recourse to the banking system. Launched in March, the scheme it had 150,000 customers in June, with 2,500 new users signing up each day. Safaricom expects 1m customers to be using the service by the end of the year. At the same time the company has also kept pace with the niche demands of higher income users, for example targeting the business community with its BlackBerry wireless voice and data services.

The new reality

Whatever the arguments about Safaricom's past, its future is likely to be less cosy. With the mobile market maturing, CEO Michael Joseph has already warned that the company expects declining growth in profits for the second half of 2007. Meanwhile, the company is facing greater competition as new rivals enter Kenya's wireless telecoms market.

Telkom Kenya has responded to the upcoming loss of its stake in Safaricom with the launch of its own mobile operation, Telkom Wireless, operating on an advanced CDMA network. Meanwhile Econet Wireless, the operator originally licensed to launch Kenya's third mobile network back in 2002, appears to have finally settled its long running dispute with the Kenyan government. It will be authorised to launch operations should it satisfy the condition in its original license that requires it to prove 30% local ownership of its operation, and pay the outstanding US$12m on its license fee.

Safaricom is already moving to meet the threat posed by its new rivals. It is currently testing its 3G service, prior to the roll-out of a US$285m investment, including 460 new base stations. Meanwhile it has responded to Telkom Wireless's decision to target Kenya's rural communities by channelling 45% of its new infrastructural investment into expanding its network into rural areas. The move will address a major obstacle to further growth, the fact that its network currently reaches less than 70% of Kenya's population.

Of course, even in the absence of greater competition, the company could not be expected to keep up with its current stellar rate of growth. It is no coincidence that the Kenyan government is seeking to drive through Safaricom's IPO at the time when the impact of its competitors has yet to be felt. In future years Safaricom may appear much less exceptional.

Safaricom statistics

SOURCE: INDUSTRY BRIEFING