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Safaricom VS CCK.

According to Wikipedia, a network effect is the effect that one user of a good or service has on the value of that product to other people. When the network effect is present, the value of a product or service increases as more people use it. The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase their phone without intending to create value for other users, but does so in any case. Over time, network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop.

The network effect is the very reason why Safaricom is so successful. The more people there are on their network, the more people subscribe to it because everyone else is on their mobile network. This has resulted in Safaricom having 15+ million mobile subscribers to-date and approximately 70% market share. In a nutshell, this is why a storm is brewing between Safaricom and the Communications Commission of Kenya (CCK), the regulator in Kenya for all things communications. This storm is being caused by the announcement of the Kenya Information and Communications (Fair Competition and Equality of Treatment) Regulations 2010 which are almost certainly being rolled out to tame Safaricom’s market dominance. The stated objectives of the new regulations from the CCK are as follows:

  • Provide a regulatory framework for the promotion of fair competition and equal treatment in the telecommunications sector.
  • Protect against the abuse of market power or other anti-competitive practices within the communications sector.
  • Provide for the standards and procedures to be applied by the commission in determining whether particular conduct is anti-competitive.
  • Clarify the agreements. conduct or practices that the Commission shall consider to be anti-competitive, and prohibited under the Act.
  • Provide for the standards and processes that the Commission shall apply when determining whether a telecommunication service provider is dominant in a given market.

In a nutshell, the new regulations give the CCK a broad range of powers that are geared towards ensuring a level playing field in the telecommunications sector. However, more specifically, the regulations will potentially put Safaricom at a serious disadvantage should CCK deem Safaricom to be using their market dominance for unfair competitive practices. The regulations are indeed far reaching in terms of affecting how Safaricom will operate going forward. Not surprisingly, the new regulations have been met with approval from the other telecommunications players (i.e. Zain, Orange and YU) who see it as working in their favor to rein in Safaricom’s market dominance.

From my perspective, the new regulations have both positive and negative aspects. On one hand, Safaricom is incredibly strong in terms of market leadership and business performance. However, they only achieved this position through innovation, sound business practices and being market-focused. They also invested heavily and continuously offered a value proposition that was levels above the competition, which invariably let them grow their market share over the years to its current level.

But then again, it would seem that this same market dominance could be the very reason that Kenya does not have viable alternatives to Safaricom. For instance, Safaricom still boasts the only 3G service that required them to invest massive financial resources to secure it that none of the other competing mobile networks are willing to pony up. There is also the matter of Safaricom often coming up with reactive offers that counter anything that the competition can dish out resulting in them under performing. Its a David vs Goliath scenario.

Going forward, I am keen to see how this will all pan out, as well as what can be expected from Safaricom’s competition in response. For sure there is room for the competition to come up with initiatives that allow them to gain market share. In addition, mobile number portability will soon be possible in Kenya and as such mobile subscribers will be able to move their numbers between networks. I am also especially keen to see how Zain Kenya will perform once Bharti Airtel’s investment kicks in since they have been hugely successful in India and they have strategies that could seriously rattle Safaricom. At the end of the day, regulation can be a good or bad thing for the market and CCK will have to take a balanced approach on this one.

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9 Comments

  1. May 8, 2010 at 6:51 am — Reply

    It will be interesting to see what strstegies the other service providers will employ when safaricom launches 4G services.Rates for 3G internet connection are too high and lets hope increased competition will change all this.

  2. May 8, 2010 at 7:57 am — Reply

    There are two points I would add here:

    Michael Joseph pointed out that a dominant player should only be penalised if found abusing its dominance. The regulations don’t contain a definition of abuse – an issue that he had repeatedly raised with CCK and the ministry, and that they had promised to include. And then conveniently forgotten?
    http://www.ratio-magazine.com/201005052971/Kenya/Kenya-Safaricom-Willing-to-Sue-Against-New-Tariff-Regulations.html

    Also, when Celtel took over Kencell in 2004, their market share had just fallen from 50% to 40%. Still quite substantial. So is it fair that Safaricom should now be punished for Celtel’s/Zain’s inability to retain its market share, and capitalise on the fact that it had been in the market for 10 years?

    Bharti, I think, also usually work in the high-volume, low-cost segment. Exactly the same segment where Orange and Yu have been trying to compete on low prices, and keep losing money.

    • May 8, 2010 at 8:48 am — Reply

      @Andrea thanks for your observations on this hot button issue. I think its only building up and the coming months will determine how this goes.

  3. May 8, 2010 at 2:38 pm — Reply

    with 15 million subscribers & 80% market share, Safaricom has unhealthy dominance.
    I think safaricom is abusing its dominance, although they wont admit it.
    They paid a high price for 3G license and insist all players must pay the same price when we know the other players cannot afford it.
    They continue to maintain the highest tariffs around because they know subscribers are locked in : wont go anywhere and risk losing contacts.

    The only way CCK can put pressure on safaricom is bring down the interconnectivity fee to a low 2 shillings. Did you watch Michael joseph interview after CCK announcement? The guy was in pain but this will surely drive MJ nuts!
    .-= constantine´s last blog ..2010 Pittsburgh Half & Full Marathon Photos : Pictures =-.

  4. May 10, 2010 at 3:34 am — Reply

    First off Sijuicom…oh sorry Safcom is just full of B.S. Let me set some facts straight…the so called innovation that people in Kenya allude to when they speak of Safcom is non existent. Mpesa was first initiated as a Vodafon product with help from Sagentia. In fact the pilot team that started the roll out received very little support from Michael Joseph (MJ) and his boyz. So those who credit Safcom to Mpesa need to raise their heads above the clouds and look at Vodafone to see the same product in Afgahnistan (Mpeisa). I mean if you want to try something out why not go to the smallest market..ie. Kenya…Safcom started with per second billing as its claim to fame and large profits hence the network effect that moses talks off. There is talk that this move was simply coz it was government owned at the time (Check out http://www.iddsalim.com/blog/2010/05/06/is-safaricom-a-cry-baby-or-are-they-being-arm-twisted/)…Look at Safcom’s CSR budget..look at their revenues…look at their margins…I hear of only sycophancy when I hear people defending MJ.
    Safcom is an 800 pound gorilla fed generously by another Gorilla in Vodafone (Vodafone C.E.O. earns 2 mill euros/month…Cristiano Ronaldo does 6 mill euros/annum)and initially our very beloved government…Its one thing to be innovative and profitable…its another to be greedy and there is a fine line that Safcom hurriedly crossed in its rush to get on to the next billion.Recently MJ spoke on an exclusive interview with Aly Khan (see it on rich.co.ke) and he intimated how he went on a WORLDWIDE ROAD SHOW promoting Safcom stock to investors what with the problems in the west and all. Is it not convinient to pump the stock options you own before you exit the company? I would do it in a heartbeat. MJ is a hustler, so much love to him (dude was once a cab driver so really credit to his game) but his cries are coz CCK just cant stand the money he is making. Thank God Bharti is here to clip some wings of this thing :-))
    .-= Tirus Muchiri´s last blog ..Mixtapes: The Entry Level of Hiphop =-.

  5. May 13, 2010 at 9:29 am — Reply

    Constantine, sadly in this case it’s entirely irrelevant if or why you ‘think’ that Safaricom abuses its dominance – it’s bad legal drafting to not define what constitutes abuse, and how this will be investigated and dealt with. Bad regulations are not good for business.

    And you actually point your finger at a crucial issue: No, with a strategy based on rock-bottom prices, the others can’t afford to pay for the 3G license. Safaricom can, because the tariffs they charge enable them to make such investments in technology. So they are one step ahead again. I’m sure Safaricom didn’t insist on paying that themselves, but that’s the price the government set.

    You also don’t address the fact that Celtel started out with a 40% market share – how come they are suddenly at 14%?

  6. Lucy
    May 15, 2010 at 3:57 am — Reply

    Reading some of the comments above, I gather that Kenyans will hate you and demonize you for being successful. Currently all the other companies are busy lowering their prices as if they do not know that cheap is not always the solution to counter competition. You will lower the prices yes, but you will have problem covering your costs.

    On MPESA, we should understand that whether it was somebody elses’ idea or not, Safaricom has made it successful by putting in a system without which it would fail terribly. I said “SYSTEM” because it could be the reason why SOKO TELE failed and now has evolved as ZAP.

    If the other companies are unable to counter competition, don’t sabotage the giants.

  7. June 1, 2010 at 8:19 am — Reply

    i follow the above discussion (at time misinformation) with curosity.
    if most of us will remember, there is a relationship between investments and revenues.
    what Safaricom did was invest heavily in areas it forsaw will earn it good revenues..especially in the data segment.its thus not a coincidence that it paid alot to acqiuire the 3G licence (and with China testing 4G, i will not be surprised to see safcom acquire it too)
    so lets give credit where it deserves

  8. […] Kemibaro wrote From my perspective, the new regulations have both positive and negative aspects. On one hand, […]

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