Telkom Kenya sparks pricing wars as it rolls out wireless

The telecommunications sector pricing war that has been raging between the two mobile phone firms, Safaricom and Celtel, is set to climb a notch with this afternoon’s launch of Telkom Wireless, Telkom Kenya’s Code Division Multiple Access (CDMA)-based service that has been in operation since late last year.
The service, which boasts of superior sound quality and wider coverage than the GSM-based networks is offering consumers the lowest calling rates per minute and is expected to kick off a new round of price cuts in the mobile phones market.

Experts say CDMA, a wireless technology that has been in use mainly in the United States, though known to only a small number of Kenyan consumers is likely to be the biggest upset in the telecoms market since the GSM revolution that saw prices drop by more than 500 per cent and subscriber base quadruple in five years.

Mainly targeted at rural subscribers, Telkom Wireless is offering subscribers a standard rate of Sh5.50 per minute for calls within its network and fixed Telkom Kenya network. Peak hour calls to other networks are priced at Sh19 per minute while of-peak charges are fixed at Sh14 per minute.

Despite lowering its rates last week, Safaricom remains the most expensive service provider where the cheapest rate at which subscribers can call within the network is Sh8 a minute. The cheapest calls to other networks are priced at Sh10.

Celtel, which has been fighting to gain more share from its dominant rival, kicked off the pricing war by introducing flat rates for calling between networks last December. The move instigated a slight shift in customers who were now able to enjoy cheaper rates to call the competitor network Safaricom, paying just Sh24 to call any other network.

Telkom Kenya’s managing director Sammy Kirui said the wireless network now covers 70 per cent of the Kenyan population —more than 10 the area covered by either Safaricom or Celtel networks.

Though currently weakened by a low subscriber base, Telkom Wireless poses the biggest threat ever not only to the growth of subscriber base for both Safaricom and Celtel but also for profits growth in the telecoms sector.

In fact aggressive marketing of the service is expected to throw the mobile phone service providers into an operational dilemma with huge implications on the revenue base.

If they fail to respond, they expose themselves to a massive migration of price sensitive subscribers to the Telkom Wireless network. If they, on the other hand, choose to respond by cutting their prices to the Telkom level, they will basically erode the revenue volumes that have been the source of super profits in the telecoms subsector, especially in the voice market.

Safaricom, the market leader has already crafted a response plan part of which is to double its investment in network roll-out to Sh19 billion to set up 460 new base stations and is testing a 3-G service — the latest version of the GSM technology.

Over the past five years, deeper penetration of the market by Safaricom and Celtel has piled pressure on voice calls nearly making Telkom Kenya irrelevant.

Now Telkom is coming out as the company to watch as it prepares to make deeper price cuts and to renew a marketshare war that has been raging as it watches in the sidelines.

Telecoms industry insiders say it will be hard for Safaricom and Celtel to confront Telkom in a pricing war because of the way the national operator’s service is structured.

Though operated by Telkom Kenya, Telkom Wireless traffic runs on a government owned network that has been with a Sh20 billion loan from the Chinese government. This arrangement is said to provide Telkom with an avenue through which to avoid some tax obligations in its airtime pricing.

Telkom is said to be exempt from paying the 10 per cent excise duty charged on airtime and has also not been asked to pay a licence fee of Sh55 million as did Celtel upon entry into the Kenyan market.

Besides, other operators reckon that Telkom Kenya is using the CDMA technology to breach its licensing specifications and to turn the heat on them.

“We are of the view that TKL is operating an unlicensed telecommunication system and telecommunications services in Kenya Contrary to section 24 of the Kenya Communications Act 1988, “Clare Ruto, the firm’s Corporate and Regulatory Affairs Director said in a statement .

She added : “As of now, TKL is licensed of operate fixed telecommunications line system as the term “telecommunication line” is defined under the Act and to offer fixed telecommunications service and not CDMA.”

Celtel says it has lodged an official complaint with CCK highlighting the matter but it was yet to receive official communication from the regulator.

But Telkom describes CDMA as a fixed network that provides users with portable mobility but its competitors maintain that it cannot offer the service without a unified licence.

John Waweru, the Director General of Communications Commission of Kenya, the industry regulator has in the past maintained that Telkom does not need a new licence of the service since it had the licence long before both Safaricom and Celtel entered the market.

Telkom is banking on the wireless technology to curb the loss of millions of shillings it loses annually through vandalism of its cables.

The fixed operator has made 300,000 connections to the wireless service that uses simultaneous access to a radio frequency or spectrum over a wide bandwidth and can deliver sound and pictures of television quality.

All CDMA users in major towns are assigned own codes, and the capacity of the system is such that one frequency can handle hundreds of calls and data at the same time.

Six months ago, Telkom which is being spruced up for sale later in the year had “less than 300,000 fixed line subscribers in its network, with blended average revenue per user of Sh2,800 per month . Its 174,000 post-paid customers represent 70 per cent of the total post-paid market, both fixed and mobile.

To enable Telkom set individual service prices within a more inclusive basket, CCK has modified Telkom Kenya’s licence for basic retail narrow band services beginning this month. Part of the specifications will see the operator adopt new price caps that subjects call termination services of loop operators to the same price as Telkom Kenya.

Telkom says its strategy is to offer “a platform of converged fixed and mobile multimedia products that will help it cut costs as well as improve service quality to its customers.”

The company has signed large-scale capital commitments amounting to Sh2.8 billion and whose lifespan stretches up to 2008.

CDMA’s coverage of remote areas where access to the telecommunication is low marks a revolutionary development in rural Kenya that is expected to connect at least four million people. More than 80 per cent of the Kenyan population remains outside the telecoms market.

Telkom is also enticing subscribers with cheap CDMA handsets that cost as little as Sh3,999 ($58) against an average price of Sh5,000 for GSM based handsets.

Source: Business Daily