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.
The last couple of weeks have seen a whole raft of new developments in Kenya’s Internet and Telecoms sectors: