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Thursday, August 19, 2010

Siku za mwizi ni kama bamba 20 - Zain drops the A-Bomb on Safaricom

Zain Kenya has surprised the market and thrown a major challenge to mobile phone services leader Safaricom by drastically slashing call charges for its subscribers to other networks.

Bharti Airtel, which now owns Zain, appears keen on breaking the company’s history of tame marketing, and is using the reduction of inter-connectivity rates by the Communications Commission of Kenya to take Safaricom head-on, with the boldest advertising and predatory pricing ever seen in the local industry.

Zain yesterday slashed tariffs on all calls by its prepaid and post-paid Subscribers to other networks to Sh3 per minute, and SMS to Sh1, mocking Safaricom’s slogan "the better option". A line in the adverts, written in Safaricom’s corporate colours, reads: "Going green is not always the better option," and "Going green is not always a great idea." Other players charge between Sh2.50 and Sh5 for SMS services.

"The tariff is not an offer, but a value proposition, which will make mobile services affordable," said Rene Meza, Zain Kenya managing director. "We are leveraging on the economies of scale offered by our new shareholders to offer quality service to our customers," said Meza.

Many Kenyans greeted the news with surprise and joy, and there were long queues at Zain shops in the city centre to confirm the changes. However, observers questioned whether the new rates were sustainable, and said profits across the industry would definitely take a beating. The Zain move anticipated the unveiling by the Communications Commission of Kenya of new interconnection rates.
And it is a bolder face of Zain. The company is keen to end its early association with the more moneyed corporate class — when it was known as KenCell. That history has been its Achilles heel for far too long. But now, with an aggressive owner in charge, the firm is placing all its cards on the table.

According to Zain, the new offer is not a promotion, but permanent. Outgoing Safaricom CEO Michael Joseph had in the past said the company would not engage in price wars with the competition, because they were "unsustainable." Subscribers will now be watching to see what Safaricom, Kenya’s richest and most innovative company, does to counter the threat. They will also be hoping that Telkom and yu follow Zain’s lead, rather than wait for Safaricom’s reaction to its main rival. That would signal a tariff reduction bonanza that could chip away at Safaricom’s call Revenues.

Bharti Airtel, the fifth largest telecommunications firm in the world, recently bought Zain and will be spending Sh24 billion in the next 18 months to re-position itself as a key player in the local scene. The move by Zain followed Monday’s announcement by Communications Commission of Kenya of new interconnection charges, which have been reduced to Sh2.12 from Sh4.72 effective September 1. The reduction is in line with recommendations of a UK-based consultancy firm, Analysys Mason—hired by CCK—which proposed gradual reduction of the rates and eventual scrapping off of the fees by 2014. In 2007, the fees stood at Sh6.4, in 2008 at Sh5.6 and Sh4.72 last year. High interconnection fees have in the past been blamed for expensive across-network calls, as it does not make economic sense to lower call charges below the interconnection fee.

The development officially places Zain ahead of Safaricom, yu (the network owned by Essar Telecom Kenya) and Orange Telkom as the cheapest mobile services provider in the country. Zain’s move is the latest in a continuum of price wars that started late last year, after Essar’s yu brand announced a Sh6 per minute flat voice charge across all networks.

The decision by yu, which targets the mass market, has seen its subscriber numbers pass Orange Telkom in a matter of months despite Yu being the last to enter the Kenyan market. Currently, Orange in its ‘Niaje’ tariff charges Sh4 on calls made within its network and Sh8 to other networks.

Safaricom has an intelligent billing system dubbed Supa Ongea, which calculates call charges based on the location, time and how busy the network is, before charging. It is now the most expensive network to call from or to other networks, despite having reduced its charges for calls to other networks to Sh12.

Experts say Zain’s decision to lower its call rates is just the tip of an impending bruising battle for market share. "It is going to be a long, bruising battle for market share, especially with the rules on competition, number portability and infrastructure sharing coming into place," said Meza.

And with the scaling upwards of its investment plans for Kenya, Zain intends to invest in a superior 3-G network, and 500,000 cell sites to ensure 90 per cent country coverage by year’s end. In addition, Zain will invest in re-engineering its distribution channels by doubling its outlets within the same time span. "We are going for the market leader position, especially now that we have a shareholder with whom we are in sync with," he said.

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