What Next for Safaricom as Dominance Debate Rages on in the Telco Sector?

Safaricom (NSE: SCOM) is back in the limelight with proposals to have it halt on-net discounts and individually tailored loyalty schemes to reduce the barriers to entry for smaller players.

This is according to the latest recommendations to the Communications Authority of Kenya (CA) by British Firm MS Analysys Mason who carried out Telecommunication Competition Market Study in Kenya’.

In its report findings presented to the stakeholders and members of the public, Analysys Mason disclosed that “An earlier draft of the report proposed implementation by end of 2017 with functional separation of Safaricom and M-Pesa if this was delayed by factors within Safaricom’s control.”

“This remedy could be seen as disproportionate and constraining the CA’s discretion to act as it saw fit at the time. Final report is therefore, silent on what further remedies the CA might consider,” reads the report in part.

This relates to earlier concerns in 2015 by Airtel  that called for a review into Safaricom’s business model of operations which allegedly favoured the operator and wanted it to be declared dominant.

“The study was specifically meant to foster a competitive telecommunications market which can attract sustainable investments, provide more choices to consumers and increase consumer welfare through the provision of affordable high quality services,” according to the CA.

The Authority in May 2016 contracted M/S Analysys Mason of the UK to undertake the study.

On the other hand, in June 2017 during the rebrand of Orange to Telkom Kenya, Eddy Njoroge, Chairman of the Board, posed that “There is need for scrutiny and consideration in the sector in order to ensure fair competition. How can investors get a return where a market is skewed?

Njoroge had cited that it goes against pro-investment policies of the Government of Kenya, and risked slowing down Foreign Direct Investment (FDI) into the sector.

“The bottom line is that the market will not survive in the long term unless a robust policy mechanism is put in place to ensure healthy competition and overall sector development and growth by way of further investment,” he added.

Kenya’s top three telco companies Safaricom Limited, Telkom Kenya and Airtel Kenya continue to invest heavily in their product offerings and infrastructure to improve their networks.

For instance, according to Safaricom’s annual report and financial statements 2017,  they currently have the widest reach in the country with 4,677 sites providing 95 percent population coverage for 2G and 3,517 3G sites with a population coverage of 85 percent. Their fibre network connects key cities and towns spanning 4,700 kilometers.

On the other hand, Telkom Kenya believes that ‘To provide the best value for a simpler life, efficient business and stronger communities’, “Expanding our network is essential to delivering the mobile and broadband needs of tomorrow,” says  Aldo Mareuse, CEO of Telkom Kenya.

In 2017, Telkom invested KSh 5 billion towards network modernisation leading to the launch of its 4G network, which is currently available in 32 towns and urban centres across the country.

In 2018, Telkom gearing is for the second phase of investment with regard to network
modernisation and expansion.

The findings by Analysys Mason found out that Safaricom has more than 70 per cent market share of subscribers, minutes and revenue and benefits from a very high share of on-net traffic, paying out less than Airtel.

To remedy this, Analysys Mason propose that Safaricom to share its infrastructure with other networks to improve accessibility in seven of the most rural counties for 5 years.

“We believe that Safaricom’s high market share in the retail mobile communications and retail mobile money market has led to its high market share in the wholesale towers market, by making it uneconomic for the other Tier 1 operators to roll out in rural areas. Intervention in the wholesale towers market has therefore become a necessary remedy to allow other operators to compete more effectively in rural areas.”

“The original tower sharing proposal covered 14 counties and has now been reduced to 7 northern counties based on principle of proportionality and in recognition of investment made by Safaricom in rural infrastructure,” said the report.

Safaricom’s 4G sites currently covers about 25 per cent of its network while 3517 3G sites covers Safaricom’s network.

Consequently, in December, Cytonn Investments Plc in their report focusing on ‘Safaricom’s 44 per cent of NSE Market Cap. and Portfolio Construction’, faulted its dominance at the Nairobi Securities Exchange (NSE) that it minimises portfolio diversification.

Safaricom, which is Kenya’s largest technology firm, accounts for 44.0 per cent of the Nairobi Securities Exchange (NSE) capitalisation.

According to Cytonn, investors and portfolio managers “Should be cautious of the equities market dominance by Safaricom, and in constructing a portfolio, should look for ways to discount allocation to Safaricom to something lower that the 44 percent it represents in the market, in order to achieve a portfolio that objectifies performance and risk diversification.”

Bob Collymore, Safaricom CEO when releasing the telco’s annual report and financial statements 2017, he reiterated that they exist to fulfill a purpose founded on three pillars: Putting the customer first, delivering relevant products and optimizing operational excellence.

“That purpose is to transform lives. We have continued to implement transformative strategies that touch the lives of our shareholders, customers, staff members and other stakeholders.”

However, the CEO further stated “For equitable growth in the sector, (Safaricom) feels it is important that our competitors are held up to the same stands so that our policy of sustained investment is not punishment. We will continue to invest in our business and pursue new business interests.”

“While Safaricom’s market share in some segments remains high, this has been attained through prudent investments and continuous innovation.”

CA has already said it does ‘not want to punish success’ as the sector awaits its final adoption of the recommendations which are expected around June this year.