Telecoms in Kenya compete on data delivery and mobile money transfer

Kenya’s telecommunications sector plays an important role in the country’s economy, benefitting from decades of infrastructure investment, early adoption of next-generation mobile broadband services and rapid growth in the mobile money transfer segment, with Kenya pioneering the latter. The industry as a whole has been on an upward trajectory over the last decade, as a burgeoning, tech-savvy middle class drives demand for smartphones and data, helping companies offset slowing growth in the voice and messaging segments. Operator Safaricom holds the dominant market share, but competition has been increasing, and the rollout of new spectrum and a push to expand data services is creating new revenue-generating opportunities.

Market Background

The bulk of Kenya’s telecommunications industry has been driven by three major operators: Telkom Kenya (Orange), Safaricom and Airtel Kenya. Telkom Kenya was originally established as the Kenya Post and Telecommunications Corporation (KPTC) before its mobile division split in 1997 to form Safaricom, followed by further restructuring in 1999 that created three new entities: Telkom Kenya, the Kenya Postal Corporation and the Communications Commission of Kenya, which was renamed the Communications Authority of Kenya (CA) in June 2014.

The CA acts as the industry regulator under the umbrella of the Ministry of Information, Communications and Technology. It is responsible for developing the country’s broadcasting, multimedia, telecommunications, electronic commerce, postal and courier services, and its mandate extends to licensing, spectrum allocation, e-commerce development, consumer protection, managing competition, setting tariffs and overseeing the country’s Universal Service Fund, which is expected to significantly improve voice and broadband connectivity in remote rural areas through the construction of new infrastructure (see analysis).

Foreign investment in Kenyan telecommunications is permitted, although all companies licensed to operate in the sector are required to have a minimum of 20% Kenyan equity ownership. Some operators may be given a license without meeting these requirements on the condition that they comply with foreign ownership limits within three years of establishing operations.

Telkom Kenya

Operating under the Orange brand after the firm acquired a stake in the company in 2008, Telkom Kenya is the only provider offering fixed line services in the country. The firm held a 51% stake in the company with the government holding the remaining 49% until 2012, when Orange acquired an additional 9% in December of that year following a move to write off KSh30bn ($292.7m) of debt. Orange acquired an additional 10% in June 2015 after the government’s failed bid to inject the company with KSh2.4bn ($23.4m) in a KSh10bn ($97.6m) rights issue.

In February 2015 Orange officials told media they had lost control over the company’s investment decision process, and announced plans to sell Orange’s entire 70% stake. In June 2016 the Kenyan government re-acquired a 10% stake in the company, bringing its total share in the company to 40%, while the remaining 60% was acquired by Helios Investment Partners through Kenya’s Jamhuri Holdings. Telkom Kenya continues to operate under the Orange brand and had market share of 7.4% in December 2016, according to the CA.

Airtel

Airtel Kenya, part of India’s Bharti Airtel, is the country’s second-largest mobile operator, holding a 17.6% market share in December 2016. The Indian firm acquired all African business from Kuwaiti telecoms company, Zain, in a $10.7bn deal in 2010.

Airtel’s customer base rose to 7.6m at the end of 2014 after the company acquired 2.6m new subscribers following the market exit of yuMobile in September of that year, when Indian investment group Essar chose to sell it. Market holding and subscriber figures have remained relatively constant, although CA indicated a slight decline in Airtel’s market share of 1.7% in the first quarter of 2016, as a result of the company cutting service to 500,000 unregistered SIM cards on its network in December 2015.

Safaricom

Holding a 71.2% market share as of December 2016, Safaricom is the largest mobile operator in the market and largest telecommunications company in East and Central Africa. The provider maintains over 25m subscribers, generates more than KSh150bn ($1.5bn) in annual revenue and offers 2G mobile coverage to approximately 95% of Kenyans.

The company began operations as a department under the KPTC in 1993, and was incorporated as a private limited liability company in April 1997, before becoming a public limited liability company in May 2002. Prior to 2008 the government held a 60% stake in the company and Vodafone Kenya held 40%. Following a 25% share listing in 2008 that was more than five times oversubscribed and raised $833m, the government now holds a 35% stake; 25% is floated on the Nairobi Stock Exchange; and the remaining 40% is held by Vodafone.

Safaricom’s market share has declined from a peak of 80% in 2008, but its subscriber base has continued to expand over the years. The CA reports that the company recorded a 4.1% increase in pre-paid subscribers during the last three months of 2016, and a 7% increase in post-paid subscribers during the same period, with its total subscriber base now standing at 27.7m.

Competition

Concerns over competition have been voiced in recent years, particularly in light of Safaricom’s large market share, prompting the authorities to address the issue. In July 2015 Fred Matiang’i, Kenya’s former ICT cabinet secretary, told media that the government was planning to introduce new regulations aimed at preventing and breaking up monopolies, which could have resulted in Safaricom being split into three separate units. However, the following month Githu Muigai, the attorney general, wrote a letter instructing Matiang’i to withdraw the proposals, pending further discussion. In December 2015 President Uhuru Kenyatta signed the Statute Law (Miscellaneous Amendments) Act, which sees the CA and the Competition Authority of Kenya consult each other on issues such as unfair market competition.

Mobile Virtual Networks

Airtel has an extensive national network and has recently begun leasing out its infrastructure to several of Kenya’s new mobile virtual network operators (MVNOs). MVNOs are known for their less expensive, more flexible consumer plans, but often come at the price of slower data speeds.

In April 2014 the CA announced that it had authorised three MVNOs to use Airtel’s infrastructure: Mobile Pay, Zioncell Kenya and Finserve Africa. Another company, Equitel, joined the network in July 2015 and MVNO SEMA Mobile launched operations in Kenya in early 2016, also utilising the Airtel network.

Mobile Performance

The Kenya National Bureau of Statistics (KNBS) reported that although the country’s mobile capacity fell by 3.5% to 62.8m users after yuMobile’s exit in 2014, the entrance of Equitel pushed mobile connections to increase by 12.1% in 2015, reaching 37.7m subscribers. As a result, used mobile capacity rose from 51.7% in 2014 to 60.1% in 2015. Mobile penetration consequently rose from 78.3% in 2014 to 85.4% in 2015, according to the KNBS, although the CA reports that penetration stood at 87.7% at the end of 2015.

CA data shows that penetration continued to rise in 2016, with the year ending at a total of 38.9m mobile subscribers – a 1.2% year-on-year (y-o-y) increase – for a penetration rate of 88.2%. Of all mobile subscriptions in the country, 96.4% were pre-paid.

However, the overall penetration rate in Kenya is lower than a number of other major African markets, such as Nigeria and Ghana, where penetration surpasses 100% due to ownership of multiple SIM cards.

Prices

According to the “Economic Survey 2016” report published by the KNBS, fees for installation and subscriptions remained unchanged in 2015 at KSh3394 ($33.12) for service installation and KSh580 ($5.66) per month for a fixed-line subscription.

Prices in 2015 declined for the average cost per minute of fixed-to-fixed local calls, from KSh4.5 ($0.04) to KSh3 ($0.03), while fixed-to-mobile call costs were unchanged at an average of KSh9 ($0.09) per minute. The average cost per minute of mobile-to-mobile calls dropped slightly from KSh3.1 ($0.03) in 2014 to KSh3.08 ($0.03) in 2015, while mobile-to-fixed calls remained at KSh3.25 ($0.03) per minute.

Voice & Sms

According to CA statistics, the total number of voice minutes used per subscriber per month was 92.7 during the last three months of 2016. The CA reports that during that same period, the total number of voice minutes originating from mobile networks grew 5.6% y-o-y to 10.8bn minutes.

By operator, Safaricom’s market share of voice traffic in the final quarter of 2016 reached 80.6% and a total of 8.6bn minutes. Airtel’s figures slipped slightly to record 1.46bn minutes and a market share of 13.5%. The numbers of Telkom Kenya declined substantially in the last few months from earlier in 2016, tallying just 590m minutes and holding 5.4% of the market.

MVNOs Finserve Africa and SEMA Mobile had market share of 0.4% and less than 0.0%, respectively. SEMA mobile, which launched in the first half of the year, recorded 42,205 voice minutes for the quarter.

The KNBS reports that the total number of SMS messages received from abroad fell 19% to 131.1m in 2015, compared to a 60.7% surge in 2014. The CA further reports that total SMS messages sent in the final quarter of 2016 rose to 15.8bn, up 29% from the 12.2bn message sent one quarter prior; this was assumed to be the result of sending holiday greetings to friends and family at that time of year. SMS messages are likely to remain an important income source for operators over the medium-term, as younger users are comfortable with this mode of communication.

Data

Kenya has offered 3G coverage for several years. Safaricom was the first operator to offer high-speed mobile broadband service with the launch of a 3G network in May 2008, followed by Telkom Kenya in August 2011 and Airtel in February 2012. If voice and SMS revenues soften – as is being seen in markets around the world – the ability to earn revenue from data services can compensate for the expected loss.

Smartphone and mobile broadband penetration have risen rapidly, with data revenue now rivalling SMS revenue at Safaricom (see IT overview). Furthermore, the sector has witnessed a surge of new investment as operators move to set up next-generation 4G LTE networks in a bid to capture a greater market share, particularly outside of the capital.

4g Lte

Development of 4G data in Kenya kicked off in October 2010 when Safaricom launched its first 4G trials on spectrum left idle by the country’s ongoing migration to digital cable services, as 4G spectrum had not yet been made available in the country. Although the government announced it would withhold 4G spectrum auctions in favour of an open-access network developed under a public-private partnership model in November of the same year, the plan had been shelved by December 2013. In November 2014 Safaricom announced plans to launch a 4G LTE network in the coming year, covering Nairobi, Mombasa and commercial areas in 15 additional cities.

The company launched a 4G network the following month, after signing a KSh14.9bn ($145.4m) security agreement with the government of Kenya and paying $75m for new 4G spectrum. In April 2015 it announced plans to construct an additional 200 base transmission stations to extend its 4G LTE network, with the CA announcing in the same month that it had granted Airtel and Telkom Kenya permission to begin testing their own 4G networks in the country.

Freed Spectrum

New 4G LTE services got a boost in July 2016 when the CA announced that it had approved three spectrum licenses for Safaricom, Airtel and Telkom Kenya. In September 2016, 700 MHz and 800 MHz spectrum was freed up for the large players to provide 4G services to consumers, with each operator obligated to share its 4G network capacity with smaller companies – namely MVNOs.

Although Safaricom was still the only operator in the country offering 4G LTE services as of April 2017, Airtel is poised to enter the market soon after tests in Nairobi were successfully conducted in the beginning of the year. In early 2017 the company also dispelled rumours that it was planning on leaving the African market, saying it is committed to providing services on the continent and still aims to implement 4G coverage.

The recent 4G spectrum allocation is set to help operators meet surging demand in Kenya, as well as offset any slowdown in the voice and SMS segments, as mobile data represents one of the fastest-growing revenue streams in the industry.

M-Pesa

In addition to maintaining its position as a market leader in the mobile segment, Safaricom is also a pioneer of Kenya’s mobile money transfer business, launching a first-of-its-kind service – M-Pesa – in 2007. The service had 25.1m subscribers and more than 100,000 agents as of March 2016, up from 3m users and 1000 agents in June 2008. M-Pesa allows Safaricom subscribers to conduct simple financial transactions via mobile phones, using an SMS platform. This enables 2G users in more remote areas of the country the opportunity to conduct business and financial transactions without bank branches or ATMs, and offers a solution to the country’s “unbanked” population, who often lack credit histories and formal employment. “Banks are using mobile payment gateways to reach more and more customers, which could represent a challenge to a market historically dominated by M-Pesa,” Ken Njoroge, group CEO of Cellulant.

Once an M-Pesa account is opened, the subscriber can access a virtual money account attached to their mobile number, making withdrawals and deposits at registered agents, and sending money to any other mobile phone user in the country. Similar systems have since been adopted both locally and in markets abroad, making Safaricom a decisive leader in the global mobile money transfer industry.

Platform Competition

Rapid growth in mobile money transfer activity on the M-Pesa platform has led to a surge of competition. Although voice and SMS revenues remain a major income generator for all of the country’s mobile operators, established providers have moved to diversify their portfolio to offer similar services, and new entrants have aligned their growth strategy to mobile money transfer services. Safaricom clearly dominates the mobile money market, but other operators have been making inroads. Competitors include Airtel Money, which had 4.23m subscribers and market share of 17% as of March 2016, Mobikash with 1.77m subscribers, Equitel Money with 1.53m subscribers, Tangaza Pesa with 503,556 subscribers, and Orange Money with 196,335 subscribers.

The KNBS reported that the total amount of transactions completed through mobile money platforms rose by 18.7% in 2015 to reach KSh2.81trn ($27.4bn). The number of mobile money agents in operation that year was 143,946 – up 16.4% from 123,703 in 2014 – to serve 26.8m subscribers. The CA reports that the total number of mobile money agents in operation in the last quarter of 2016 rose to 161,853, with 31.9m subscribers. The volume of transactions – deposits and withdrawals – tallied 456.6m during the period, with KSh1.1trn ($10.7bn) moved to pay for goods and services or to transfer funds between subscribers.

Fixed Line

In April 2015 Telkom Kenya decommissioned it’s Code Division Multiple Access (CDMA) network, which acted as a wireless version of its landline service. The company cited obsolete technology, expensive maintenance costs and rising competition from other telephone technologies as the drivers of their decision. As a result, subscribers under Kenya’s CDMA network were migrated to the company’s Global System for Mobile Communications network, known as GSM. This action led to a decline in fixed-lined capacity from 340,000 in 2014 to 75,000 after April 2015.

Although the KNBS reports that wireline, or fixed wireless broadband connections, rose by 77.1% in 2015 to hit 85,000 in keeping with overall trends of rising internet penetration (see IT overview), the fixed line segment is likely to continue on a downward trajectory until it becomes completely obsolete. The KNBS reported that total fixed line penetration fell to just 0.19% in 2015 from an already low 0.52% in 2014.

Outlook

As Kenyan residents increasingly embrace mobile broadband technology and data demand rises, the country’s telecommunications industry is set to remain on a mid-term growth path, bolstered by a diversified portfolio of innovative offerings.

Although rising competition will weigh on the country’s mobile money transfer segment in the coming years, deployment of new 4G LTE networks will help mobile revenues maintain double-digit growth in 2017.