[kictanet] Africa’s competition laboratory Kenya is the one to watch

alice alice at apc.org
Mon Dec 3 09:16:02 EAT 2007

  From Balancing Act

  Africa’s competition laboratory Kenya is the one to watch

No regulation regime is perfect but the three East African countries – 
Kenya, Tanzania and Uganda – are leading the way in terms of breaking 
down many of the old barriers to competition. Of these, Kenya is 
interesting because it was the pioneer and many of the things that are 
happening there will in time be seen elsewhere in some form. Russell 
Southwood explains what’s happening in Africa’s competition laboratory.

Outside of the large Sub-Saharan markets like Nigeria and South Africa, 
Kenya stands out because it has both the population level and a density 
of private sector activity to be different. In other words, it’s big 
enough to be relevant for the ten or more countries of a similar scale.

In addition, since Moi left the stage, the economy has been moving at a 
fast clip to catch up: last year economic growth was 7%. With the dead 
hand of inertia removed, Kenyans have felt more confidence in setting up 
new businesses.

The pointers it provides are as follows:

-  Even with a liberalised regime, it is incredibly hard for small 
independent companies to challenge the incumbent in the fixed line 
sector. Kenya was slow to introduce an interconnection regime designed 
for competition between many players and its two independent fixed 
wireless operators have suffered as a result. Fixed wireless is, as the 
mobile companies are discovering, far from fixed.

- Between them, Kenya’s fixed wireless operators Flashcom and Popote 
Wireless do not have much more than 10,000 subscribers and in the case 
of Popote, it’s making 80% of its revenues from data. Both use CDMA and 
are focused on the capital Nairobi, with Flashcom having a larger number 
of base stations . Subscribers can actually use their phones more or 
less anywhere in the city. Neither have yet started a wider geographic 
roll-out. Despite this lack of current success in the voice market, 
Popote’s Eric Muthi believes that there is still considerable growth 
potential. Meanwhile there are others waiting to offer more retail voice 
competition: in one case, simply as a voice service and in others as 
part of a wider offer.

- Meanwhile incumbent Telkom Kenya has adopted the strategy of India’s 
Reliance and has used its CDMA fixed wireless product as a proxy mobile 
service. It is said to have 400,000 subscribers based on its cheap 
KS5.50 a minute national rate. Subscribers have had what for all intents 
and purposes has actually been a mobile service and Telkom Kenya has 
wriggled this way and that to suggest otherwise.

- With the France Telecom take-over of Telkom Kenya, the country’s two 
operators, Safaricom and Celtel, will have some serious competition for 
the first time and may have to begin to address their quality of service 
shortfalls. Competition should also mean prices will begin to fall for 
as one person told us:”Competition in this market is really only on 
price.” Telkom Kenya’s strategy has been very savvy in that it starts 
operating with an existing base of subscribers before having to invest 
in paying for its mobile licence. Rumour has it that France Telecom will 
simply rip out the CDMA network and put in GSM. As a new entrant, it 
will have a clear CAPEX advantage. Econet is supposed to have cleared 
the hurdles it had and will be investing soon but on past evidence, 
don’t hold your breath.

- Even without a fibre connection, the country’s bandwidth requirement 
has grown rapidly as the economy has expanded. It is now approaching the 
1 gbps mark and this is all being paid for at satellite prices. The 
broader message in this is that an expanding economy will drive use both 
at a corporate and retail level. And rapid growth will come from 
economies that are coming out of war or unfavourable political 
circumstances where there’s a “one-off” bounce that might turn into 
above-average growth in the mid-term. As Bill Clinton’s electoral team 
used to say, it’s the economy, stupid. Messages on satellite bandwidth 
costs are mixed. Most operators buying in volume say that prices are 
coming down but a small number of those we spoke to said because of he 
shortage of C-Band prices were going up. (Interestingly Altech has been 
in talks to buy Sameer ICT, which includes KDN.)

- The market is readying itself for the arrival of much cheaper 
bandwidth. Seacom and TEAMS are both seen as credible projects. EASSy is 
perceived as still being in the game but its credibility has been 
undermined in the eyes of operators by the confusions over the rival 
NEPAD project. TEAMS has almost all its financing in place and says it 
has a ship booked to start. Depending on their investment, operators 
have been offered 1 mps for between US$2-300 a month. This is only to 
Fujirah but an onward solution is said to be not too far away and will 
cost about the same amount to the United States. The price will be 
higher than the headline figures suggest but nevertheless will be low 
enough to be market changing. The recent public disagreement between 
UUNet and PS Bitango Ndemo illustrates that not all operators have 
understood this changing world. It will no longer be about making money 
from selling over-priced bandwidth. The game moves to retail services 
and applications.

- A “triple play” combination of voice, Internet and TV will probably be 
offered by at least two operators next year. France Telecom is likely to 
roll out its LiveBox product as the Kenyan market has considerable 
potential. Jamii Telecom is rolling out a PONS network and wants to be 
offering “triple-play” over its new STM64 fibre metro network. Industry 
estimates of potential retail broadband subscribers vary between 
300,000-500,000. Expect bundled offers at almost European levels and 
download speeds starting at 512 kbps. The existing Government if 
re-elected wants to provide subsidised bandwidth to universities and 

- In the meantime, the retail independent retail ISP as it used to exist 
has all but disappeared and those remain are not in the best of health. 
Where have all the retail subscribers gone? Well, some have stayed with 
ISPs like Africa Online under its new owners but many more have either 
defected to the fixed wireless operators, or are using Telkom Kenya’s 
phone-in number or at the top-end of the market are using the data 
services of the two mobile operators. Only the state of Telkom Kenya’s 
copper and its distracted management focus mean that it has failed to 
harvest what might have been an extensive market. Incumbents need to 
know that if the don’t have a “low –price, high-volume” strategy for DSL 
then the mobile operators will take this business away from them.

- Apple may say that it has no plans to roll-out in emerging markets 
like China but the market has a life of its own. Apparently a shipment 
of iPhones has already reached East Africa and we saw one in the hands 
of someone we visited. He hadn’t yet got it working but he was working 
on it. Another early adopter told us that he was surprised to discover 
that it worked on his Celtel account immediately and just as well when 
he visited Someone in Uganda who used one to e-mail to confirm our 
meeting clearly had better luck. It will be interesting to see whether 
this grey market in the latest desirable phone will survive Apple’s 
attempts to exclude untied users through software fixes. European 
competition law is already being upheld in Germany where T-Mobile must 
sell the device independent of a network package and even a hefty price 
tag does not appear to be a sufficient disincentive to stop sales.

It would be unfair to say that all was rosy in the garden that is Kenya 
but in terms of competitive markets, it has got a great deal right and 
others might learn from what is happening there.

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