Airtel – Telkom Kenya Merger; Should Safaricom Be Uneasy?

Airtel Kenya and Telkom Kenya have announced a merger of operations under the brand name Airtel-Telkom. The merger awaits regulatory approval which we see no reason for denial given Safaricom’s apparent dominance. We also note that, the Cabinet Secretaries of Treasury and ICT have made accommodative comments lauding the merger including; ‘we look forward to the merger… which is well aligned with government’s agenda…’.

Over the years, Airtel and Telkom have failed to gain traction due to;

  1. Safaricom’s substantial investment compared to its competitors’ that allows it to lock customers in its ecosystem. Safaricom’s capital investments average KES 35Bn annually compared to Airtel’s estimate of KES 1Bn.
  2. Ineffective competitive strategy. Tariff rivalry (voice, SMS and mobile data) has mainly been between the two small players, with minimal price adjustment by Safaricom which currently charges a minute of call at KES 4.3 compared to competitors’ KES 2.00 – 2.60.

In our view;

  1. Sustainable competition will be based on ecosystems in addition to product. For example, recently launched Telkom’s mobile money platform ‘T-cash’ has a good angle towards simplifying payments without the inconvenient use of till/agent numbers. The problem is, it’s just a product currently and large investments would be required to build the entire network from infrastructure to agents to merchants and convince customers of its superiority.
  2. The merged entity could increase the prices of its voice and SMS services to support profitability bearing in mind that voice and SMS are no longer an effective competitive gizmo over Safaricom. We estimate that the two revenue streams could be accounting for over 80% of their service revenue (compared to Safaricom’s diversified revenue structure, c.48% from voice and SMS). Price increases may not necessarily be through direct tariff increases but could be through less (voice minutes, SMS or data) for the same current price (certain packaged products). A price increase would require a careful balance not to upset current on-net subscribers from completely switching network.
  3. We expect Airtel-Telkom to be a stronger effective competitor to Safaricom especially in the data segment. However, the overall evolving Safaricom ecosystem will be a major challenge to penetrate unless the new entity comes up with unique offers that customers would badly need in place of (or in addition to) the current Safaricom platform, and lastly;
  4. We do not expect a ‘collusive’ duopoly given the historical rivalry against Safaricom and possibility of intervention by regulatory agencies. In the duopoly market, some level of competition will continue to exist.

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by Genghis Research