New mobile entrants take on Safaricom and Zain in Kenya - Operators ramp-up capex in 2009 despite market pressures

Kenya is East Africa's largest economy but its mobile operators are facing low margins and fierce competition, a situation that has intensified following the launch of two new mobile networks in the country in Q408. Despite these pressures, Kenya's four operators are planning significant investment in their networks in 2009.

Orange Kenya, which launched its first mobile services in September 2008 following the acquisition of fixed-line incumbent Telkom Kenya, said this month it would spend KES8 billion (US$104 million) on its networks this year following capex of KES10 billion in 2008. A chunk of this capex is likely to focus on improving and repairing its fixed-line network. The other new market entrant, Econet Wireless - which is targeting the low-end market under the 'Yu' brand - has recently raised KES35 billion to fund network expansion. Meanwhile, market leader Safaricom has announced its intention to raise KES12 billion for network rollout and new services this year, in a bid to sustain its hugely-dominant market share.

Mobile penetration in Kenya has yet to reach 50 percent but an unfavourable economic and regulatory situation, involving high inflation, a weakening local currency and high corporate taxes, means that overall market growth is slowing. In 4Q08, the total number of net additions in the country (1.7 million) dropped from the previous quarter (1.9 million), the first sequential decline in net additions in over a year. GSMA Intelligence predicts that growth will continue to slow during 2009.

Kenya's mobile operators are already feeling the pain. Zain Kenya, for example, saw its net loss widen to US$89.3 million in full-year 2008, while revenues dropped 16 percent over the previous year to US$162.4 million. Its ARPU of US$4 is the lowest of all Zain's 23 global markets. Against this backdrop, Zain appears most vulnerable to losing market share to the new entrants. Orange is targeting 1.5 million customers within in its first year of operation, while Econet is aiming for 1 million customers by the middle of this year.

Safaricom saw its market share slip some 3 percent year-on-year to 78.9 percent by the end of 2008, despite adding over 3 million net new customers during the year. However, the operator has performed well amid the tough market conditions, due mainly to its well-entrenched distribution network. Safaricom is also the first - and, to date, only - operator to have rolled out WCDMA in the country. By the end of the year, the operator had built- out 285 WCDMA-enabled base stations covering the major conurbations in Nairobi, Mombasa, Naivasha and Eldoret. It is also targeting the corporate market with WiMAX, following its acquisition in August 2008 of a minority stake in WiMAX service provider, One Communications.

Safaricom has also seen huge success with its M-PESA mobile banking solution, which boasted 5.8 million registered users by February 2009 after launching in March 2007. The service targets the estimated 81 percent of the Kenyan population that remain 'unbanked.' M-PESA offers a range of banking services such as person-to- person money transfer, bill payment and ATM withdrawals, and Safaricom has recently piloted an international money transfer scheme with Vodafone, one of its major shareholders. Orange Kenya is in the process of launching a rival service.

Meanwhile, the market is set to be transformed by a new technology-neutral licensing framework being phased in this year. Under the new regime, 'unified licenses' will be issued to operators based on three broad market segments: network facilities providers, application service providers and content service providers. The new framework will enable the delivery of converged services, and is also expected to lead to consolidation among Kenya’s operators, ISPs and other service providers.

Matt Ablott, Analyst, GSMA Intelligence:

The two new market entrants have both made credible bids for market share; Orange's launch underpinned by the strength of its international brand, and Econet by targeting a price conscious segment of the market with some of the country's lowest tariffs. But the impact of a worsening economic situation in the country will affect all four operators, suggesting that return-on-investment on 2009 capex will take time. For the new players, capex is likely to concentrate on building-out their networks outside of urban areas, while Safaricom will look to reinforce its advantage in network coverage and distribution. In a country where fixed-line Internet penetration stands at less than 5 percent, there is a clear case for mobile broadband, but success in this area will depend as much on the availability of affordable devices and tariffs as having the infrastructure in place.