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Thursday 30th of October 2014 07:39:42 PM
 

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New telecoms challenge

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Telecom equipment on a mast. Companies are opting to sharing infrastructure to reduce costs. INDEPENDENT/JIMMY SIYAMTN, Airtel dismiss Smart Telecom’s new tariff war

On March 19, Simon, a Smart Telecom customer, made a call to a friend on Airtel for close to 20 minutes.

To his pleasant surprise, his entire call was billed just Shs 74. For Simon, this was a great bargain, but he was probably right to wonder for how long his 074 joy would last.

Smart Telecom, owned by the Aga Khan Fund for Development (AKFED), is the newest entrant in Uganda’s telecommunications industry, having bought off Sure Telecom’s license, which failed to make a breakthrough after operating for almost two years. Their unique offer is the flat Shs 74 tariff charged per call regardless of how long the call lasts.

 

For now, their network is limited to Kampala though officials say they are rolling out to the rest of the country.

The company’s flat rate is many times lower than the average of Shs 270 charged by other players per minute. What now remains is how the other players - MTN with 8.8 million subscribers and Airtel with over 7.2 million - will respond.

Uganda Telecom - one of the older players - has about two million subscribers while Orange has about a million. There are reports that Orange Telecom, which is also losing the battle on the data arena, which it had made its own, and the struggling Uganda Telecom, could make an exit. Will the same market be kind to Smart Telecom?

It is the same low tariff model that Warid Telecom entered with in 2008 only to fall into the hands of Bharti/Airtel last year after making losses year in and year out.

It was Warid that ignited the 2010 price war in the industry as competition for customer numbers and the market hit a climax.

This resulted into a nosedive in call rates for both on and off-network calls from a market average of Shs 380 per minute to Shs 180 per minute and later to Shs1 per second for on-network calls.

Evidently, this was not sustainable. Later in 2011, tariffs especially call tariffs went up for the entire sector to about Shs 4 per second. Warid telecom joined the bandwagon to increase the tariffs to offset the high cost of doing business. Also, inflationary pressures, high interest rates and the unstable exchange rate and high fuel prices took their toll forcing sector players to hike call rates to match with the then growing cost of doing business.

Enter Smart Telecom, whose market penetration strategy is similar to that of Warid - offering the lowest tariff for voice calls.

Most observers say it is a marketing gimmick to take chunks of subscribers from the customer base of older operators, which will be abandoned in the short term when the realities of the market set in.

Instead, market watchers have pegged the company’s future success - if it will come - on the company’s wealthy owner - the Aga Khan, whose AKFED group appears to have succeeded in other markets and sectors. Revenues from its ventures - totaling to more than 90 separate project companies - totaled $2.3 billion in 2010. In effect, these other business units could be expected to subsidise the telecom operator for strategic reasons.

But at the launch, officials suggested that they primarily have people’s interests in mind, which is why they allowed the people to choose the name ‘Smart’ after an innovative voting campaign.

Abdellatif Bouziani, the Smart Telecom East Africa CEO, said the campaign attracted more than 70,000 unique name submissions.

But if the consumer sentiments expressed an event organized by the UCC to celebrate World Consumer Rights Day on March 15, are anything to go by, telecom users generally prefer a quality telecom service probably to a cheap one.

However, according to Bouziani, they can offer both – cheap calls and a smart network. He said they were set to invest $300 million on building a seamless network in Uganda, Burundi and Tanzania.

The group has already invested in telecoms in several countries where they say they launched under the same of model of almost free calls.

They are the majority shareholder in Roshan, Afghanistan’s leading total communications provider and a significant stakeholder in TCell, the leading operator in Tajikistan, where a similar pricing model was used. But will the older operators, who boast of over 95% of active subscribers, agree to have Smart Telecom ‘steal’ their customers with fighting back by frustrating it with exorbitant interconnection rates? At least that was the master stroke that eventually floored Warid.

Unmoved rivals

Anthony Katamba, MTN’s general manager for corporate services, told The Independent on March 20 that the entry of Smart telecom won’t move them because overtime they have realized that what matters is offering a quality service to the customer. He ruled out suggestions that Smart Telecom’s low tariff would influence them to adjust their tariffs downwards. He said for tariffs to change in the market, there are a number of factors that must be at play including the overall cost of doing business in an economy, taxes among other factors.

“At MTN we set our tariff basing on the economic performance and not at what other players are doing,” he said.

Katamba, however warned that very low tariffs would have negative implications on the sustainability of the sector. “If an operator records short falls in revenues, it means they will not be able to invest in their network to keep it robust,” he said, adding that a customer would not be happy to transact cheaply on a bad network.

With a veiled reference to Warid, which sold out to Airtel last year, he said lower tariffs could lead to mergers and acquisitions, which at times come with a lot of inconveniences to the subscribers and the market at large.

Uganda Telecom Managing Director Ali Amir said Uganda’s telecommunication sector has the potential to grow but is limited by high costs, which include the vandalizing of their equipment scattered in remote locations countrywide. All these point to high expenditures on the side of the companies, which in the end affect their profitability levels among other implications. To deal with this situation, the operators have found it inevitable to outsource or share some infrastructure.

Rumors have been rife that that UTL could be the next company to be bought off, which Amir dismissed saying they were “going nowhere.”

“UTL was making losses from 2009 up to 2012 but last year – 2013 - our performance improved,” he said, adding, “We are working on cost cutting measures to boost our performance in both the voice and data segments.” Pheona Wall, Airtel’s public relations manager, agreed with Katamba but admitted that it is only natural that the entry of a new competitor should challenge them to up their game in order to keep their customer base intact. “Business is not about price wars but offering what the customer wants,” she said as she ruled out a panic adjustment of tariffs. “We are an international company and we work basing on international standards,” she said. “We cannot be blown about by anything that comes up.”

Her colleague Dennis Kakonge, the company’s legal chief, also suggested that it is better to invest in a quality network than offer lower tariffs. Airtel, he said, has so far invested over $250 million towards boosting their network infrastructure over the years.

“That’s not little money; it shows you that were came here to stay,” he said.

At the peak of the previous tariff wars, the Uganda Communications Commission (UCC), the regulator of the industry, always raised concerns about the sustainability and impact of a very low tariff on the industry. Indeed on March 15, only days before Smart Telecom launched in Uganda, Godfrey Mutabazi, the executive director, told The Independent that while the telecommunications sector was not saturated, it already has “too many operators.” He could have a point.

Uganda’s population, according to Mutabazi, comprises more than half of the people below 15 years of age, who ideally, are not active telecom subscribers.

Indeed, available data indicates a continuous growth in the population of people below 18 years from 53.8% in 1991 to 56.1% in 2012. That means that all the telecom operators have to tussle it out for less than half of the population (about 17 million people) to have them on their networks.

This is the working class group but it is not growing at the pace the telecom operators want it to, so what the telecoms have to do what Smart appears to be bent on doing - nibble away at the customer base of already existing operators.

Because of this trend, market leaders such as MTN are gradually shifted focus from voice to digital and data services, of course plus mobile money. For instance last year, MTN reported that SMS revenue declined by about 15% as more and more customers opted for data-driven social media platforms to communicate. But it was an opportunity that saw mobile data revenue rise by 57%. Smart Telecom bosses could not say if they were also looking at moving in this direction.

In order to bring more new subscribers into the net, Mutabazi said the government needs to offer incentives and reduce taxes so as to boost demand for services and thus bolster sustainable growth.

But the operators also have to invest heavily in their network infrastructure to match the growing subscription numbers on their networks. How Smart Telecom would do this sustainably without being assured of higher earnings per subscriber going forward, is what remains to be seen.

 


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