Kenyan telecoms growth assisted by 4G introduction and infrastructure upgrade

The telecoms sector continues to be a critical component of Kenya’s economic growth, performing strongly in terms of mobile money and ICT infrastructure expansion. The extension of 4G coverage is changing the face of the country’s internet use, and smartphone usage is also on the rise. Moreover, ongoing debates in the sector over issues of dominance have the potential to lead to breakthroughs, potentially boosting the sector’s maturity and leading to greater competition in the medium term.

Indicators

Kenya’s telecoms sector has continued to experience substantial growth in coverage across the population. The Communications Authority of Kenya (CA), the sector’s regulator, recorded mobile penetration at 83.9% from April to June 2015, compared to 85.5% from January to March 2015. However, this drop has been attributed to a revision in population statistics in the Economic Survey 2015 and followed healthy growth over the past year, with mobile phone penetration rising by 2.9% from January to March 2015. CA statistics for June 2015 recorded a total of 36.1m mobile subscriptions, up from 32.2m subscriptions in June 2014. Of these, 35.1m were prepaid (up from 33.9m in March), while 963,684 were post-paid (up from 937,043 in March). According to a Pew Research Centre survey conducted in 2015, 58% of those who do not personally own a mobile phone “shared one with someone else”, while of those who do own a mobile phone, 21% “share their phone with others,” widening the reach of mobile services.

Regulations

The CA, known prior to 2013 as the Communications Commission of Kenya, is responsible for the regulation of telecoms, broadcasting, multimedia and e-commerce, as well as postal and courier services. The CA is also the entity responsible for developing and implementing policy, and licensing operators and service providers. It monitors performance in line with provisions of the Kenya Information and Communications Act of 1998, and the Kenya Communications Regulations of 2001. In addition to this, the CA promotes competition, consumer protection and private investment into the sector, alongside the development of tariff guidelines.

A unified licensing framework that is technology and service neutral was introduced in 2008. Three licence types fall within this structure: the network facilities provider, the application service provider and the content service provider. All companies with a licence to provide telecoms services in Kenya are required to have a minimum of 20% Kenyan equity ownership, unless a listed company has already met equity participation requirements under capital markets legislation of at least 25% to be held by nationals of the EAC member states.

Further to this, the Central Bank of Kenya (CBK) is involved in the regulation of mobile money. The National Payment Systems (NPS) regulations of 2014 brought the law into better alignment with regulatory practice that took shape with the introduction of mobile money in 2007. The NPS regulations facilitate greater competition within the mobile money space, allowing non-bank entities to conduct mobile money services. Funds are required to be held separately from the funds of the service provider, in a trust with a high-rated and regulated bank. The regulations also prohibit lending and investment of the funds, and promote interoperability through a payment service provider management body recognised by the CBK. This is to act as a clearing and settlement house for transactions carried out by service providers, as well as a channel for communication with the CBK.

“The ICT market in Kenya, and much of Africa, is growing in large part thanks to an enabling regulatory regime, which is aiding innovation. Governments are keen on this development and have adopted policies and mechanisms that are supportive of this digital revolution,” Ken Njoroge, the group CEO at Cellulant, told OBG. This growth is expected to continue.

Mobile Operators 

The biggest change in the market over the past year has been the exit of Essar Telecom, the subscribers of which were acquired by Airtel. The departure enabled Airtel’s market share to rise from 16.5% in the third quarter of 2014 to 22.6% in the last quarter of the year. Airtel’s share then dropped from 20.2% in the first quarter of 2015 to 19.4% in the second quarter. Safaricom is the largest operator, at 67% in the second quarter of 2015, a nominal decline from 67.1% in the first. Telkom Kenya (Orange) rounded out the market in the second quarter with a 11.2% share, up by 0.4 percentage points from the first, though there are indications that it will sell its assets to cut its holdings in Kenya. Meanwhile, Equitel held a 2.4% share in the second quarter, up by 0.5 percentage points from the first quarter.

Virtual Service

In 2014 the CA authorised three firms to function as mobile virtual network operators (MVNOs) and lease Airtel’s infrastructure. Licences were granted to Equity Group Limited, a Kenyan bank, through Finserve, a subsidiary. It subsequently began providing SIM cards for no charge in October 2014. Two more providers were also given licenses as MVNOs: Mobile Pay, launched in 2011 by Kenyan-owned Tangaza Money and licensed by the Communications Commission of Kenya and the CBK; and Zioncell Kenya, owned by MobileDecisioning (MoDe), both of which also use Airtel’s network. As of June 2015, Equity Group was reporting that Finserve – branded as Equitel – had more than 1m subscriptions.

A new “thin SIM” entered the market in July 2015, following an initial legal restriction that had prevented its release to the market. A product of Equity Bank and operated by Airtel through Equity Bank’s MVNO Equitel, the SIM card can be used on both traditional mobile phones as well as smartphones. By physically placing it on top of an existing SIM card inside a mobile phone, the card essentially enables consumers to convert any phone into a “dual-SIM” device. This step enables users to bypass the lack of interoperability and sharing within the Kenyan mobile phone and mobile money market.

Competition

Disputes over allegations of unfair advantage by Safaricom and abuse of market dominance in 2014 and 2015 have been met with a greater resolve on behalf of both regulators to intervene. Part of the challenge is that the issue falls between the CA and the Competition Authority of Kenya (CAK).

The CA, for its part, has presented a set of 11 regulations that include a fair competition and equality of treatment clause that empowers the authority to automatically declare dominant any telecommunications firm with a market share of more than 50%. While this threshold also applies for CAK regulation, the overlapping authority had meant enforcement from the CA has hitherto been absent. The International Finance Corporation (IFC) is supporting the CA with technical support for “investigating and enforcing abuse of dominance rules in the sector”, and it is expected that the eventual outcome will create a level playing field for investors in telecommunications. Under the IFC’s Kenya Regulatory Reform Programme, this is to come about through strengthening collaboration between the CA and CAK, with assistance from the IFC and aimed at drawing up a common action plan based on international practices and the Kenyan legal framework. The CA’s stated goal is to “ensure a level playing field for investors, facilitate the expansion of wireless communications, and support capacity building on competition policy and regulation in the communications sector”.

The move by the two regulators came after ongoing efforts by Airtel Kenya, which charges that Safaricom enjoys market dominance without being subject to the requirements that such a market position should legally entail. As noted earlier, Safaricom commanded 67% of the market. This was compared with Airtel, at 19.4% and Orange, at 11.2%. Current regulations require the CA to declare as dominant any telecoms operator with more than 50% market share, subjecting Safaricom to a restrictive marketing and pricing business environment. Safaricom is 40% owned by the UK’s Vodafone, with the Kenyan government’s treasury owning a further 35%.

Mobile Money

Mobile money transfers in Kenya reached KSh2.37trn ($26.07bn) in 2014, compared to KSh1.9trn ($20.9bn) in 2013. According to the CA, there were a total of 27.7m mobile money subscribers in the second quarter of 2015, up from 26.7m in the first quarter of the year, an increase of 3.5% over the quarter. Of these subscribers, 21.34m used M-Pesa in June 2015, a mobile money system that was launched by Safaricom in 2007. At the same time, the number of active agents rose from 126,622 in the first quarter to 129,357 in the second quarter.

“Mobile money has completely transformed the way companies do business in Kenya,” Brian Waluchio, CEO of Oxygen8 East Africa, told OBG. “This has opened up new sales avenues for products and commodities that would otherwise be extremely difficult to market and distribute domestically.”

Lower transfer rates are seen as being a key mechanism for disrupting the telecoms market in Kenya. Fees still reach up to $1.13 for transfers, and other costs and varying rates apply. Airtel Money, which came into the market in 2011, has struggled to compete even with lower rates relative to M-Pesa. Equity is so far implementing a flat 1% rate on capping remittance costs. Safaricom’s competitors are hoping to cash in on a number of factors coming together, which could make their market viability significantly stronger. This includes capitalising on new technology, infrastructure, new services (including savings and lending offerings) and, potentially, achieving legal success vis-à-vis Safaricom through competition law to reduce the firm’s strong market position.

Phone Usage

The Pew Research Centre found in 2015 that about 88% of Kenyans surveyed used their phones to send text messages, while 54% took photos or video with their phones. Moreover, 61% of Kenyans use phones to transfer money. According to the CA in the second quarter of 2015, the average call volume in terms of time made by subscribers was 84.9 minutes per month, up from 84.1 and 73.3 during the previous two quarters, respectively.

The volume of SMS sent over the financial year 2014/15 grew to 27.4bn, up from 24.4bn the previous year. Quarterly update figures for April to June 2015 showed SMS traffic at 6.57bn messages, up from 6.55bn in the previous quarter. Those who make voice calls prefer to keep within their network in order to keep costs down, despite drops in the calling rates of rival operators. For the SMS market, as of April to June 2015, Safaricom commanded 90.3%, with Airtel taking 8%, Orange with 1.6% and Equitel with 0.1%.

Mobile Data

Most Kenyans continue to access the internet through mobile phones, rather than personal computers. According to the CA, by June 2015 mobile data and internet subscriptions had grown to 19.8m subscriptions, up from 18.7m in March, and a growth of 42.2% over the same period in the previous year. Total internet subscriptions stood at 19.9m in June, a growth of 5.9% from 18.8m in March, and a rise of 42% over the same period in the previous year, when there were 14m subscriptions recorded. Mobile broadband subscriptions for their part grew to 5.32m in June 2015, up from 5.01m in the previous quarter and from 2.91m in June 2014. Moreover, the total number of internet users rose to 29.6m in June 2015, up from 29.1m in the previous quarter, meaning that 69% of the population was accessing the internet, compared with 54.8% in June 2014.

Additional G

Safaricom is behind the introduction of 4G internet services, paying $75m at the end of 2014 for the 4G radio spectrum. The opportunity arose as part of Safaricom’s $166m deal with the Kenyan government to build the country’s national security and surveillance system, which relies on 4G technology. Safaricom’s initial rollout of its 4G network began in late 2014, with coverage in areas within both Nairobi and Mombasa Island. This will expand following the availability of additional radio spectrum. Safaricom requested an additional 800-MHz spectrum from CA in August 2015, a band preferred for its wider radius and lower costs for construction and maintenance and used for broadcasting. The regulator earlier agreed to open up the 700-MHz and 800-MHz bands in line with the June 17, 2015 global deadline for digital migration from analogue, and began a sale of the spectrum in December 2014. Safaricom made a down payment on two blocks of the 800-MHz band with the true value yet to be determined in April 2015, while Airtel and Orange were granted permission to begin testing long-term evolution (LTE) services. Orange at that time was said to be focusing on optimising 3G services, due to a lack of bandwidth and capacity that works with LTE.

In June 2015, Airtel announced that it had started work to upgrade its network infrastructure, including overhauling its core transmission equipment, at a cost of KSh19bn ($209m). Completion of the first phase of the upgrade included expanding the radio network to enhance coverage as well as to boost voice quality. Phase one covered Nairobi, Mombasa and Kitale. It has since started phase two, which should bring greater mobile data speeds and stability in the network. The undertaking is being assisted by Nokia Networks, which will make Airtel Kenya’s operation ready for 4G LTE. Earlier in 2015, Airtel had announced spending of KSh2.5bn ($27.5m) to upgrade its network and support its 3G internet access.

Smartphones

Of the nearly 3.1m mobile phones sold by 2015, 1.8m, or 58%, were smartphones. According to Safaricom, in April 2014, 67% of mobile phones purchased in Kenya at the time were smartphones, with a monthly figure of more than 100,000 units per month being sold. “The smartphone market is booming; we estimate that they represent 40% of mobile sales in Kenya. As more basic models are introduced and the price continues to decrease, we expect their market share to continue to grow rapidly,” Jerim Ouko, general manager of Simba Telecom, told OBG.

Revenues

According to the Kenya National Bureau of Statistics in its 2015 Economic Survey findings, Kenya’s telecoms operators invested a total KSh32.5bn ($357.5m) in 2014, with a 6.9% increase in revenue. Mobile revenue totalled KSh172.5bn ($1.9bn) for 2014, up from KSh140.2bn ($1.54bn) in 2013, an increase of 23%, according to the CA’s numbers for the sector. In May 2015 Safaricom reported that revenue for its voice services was up by 3.7%, at KSh87.41bn ($961.5m), but that average revenue per user was down for the financial year by 5.7%, standing at KSh328 ($3.61). Data (mobile) revenue rose by 59.2%, and revenue from fixed lines grew by 21.7%. Mobile data ARPU was up 26.4% to KSh110 ($1.21).

The KNBS found that revenue for internet service providers rose by 7.9% to KSh15.7bn ($172.7m), though investment (which also includes application service providers) was down by 8.4% in 2014. According to the CA’s latest statistics, investment into data and internet fell by 2.7% over 2013 figures and by a full 42.2% over 2012 figures. Revenues likewise saw a decline, by 53.7% from 2013 and by 14.4% from 2012, compared with a rise of 86.9% over 2011 figures.

Network Quality

Raising and ensuring improved quality standards is incentivised through the CA’s revised penalty framework. This will mean new penalties being enforced in cases where operators fail to meet service quality standards. Previously the penalty had been a flat-rate fine of KSh500,000 ($5500), but there will now be a levy of 0.1% of annual revenue in the event that a provider fails to meet quality targets.

Network Sharing

Without obligations for infrastructure sharing when it comes to mobile coverage, new entrants will have to match the infrastructure capabilities of existing licensees to be able to compete, resulting in a barrier to market entry. Underscoring the lack of progress on this front, it was reported in early 2014 that the CA wanted to make it mandatory for mobile operators to share network infrastructure to “inculcate the culture of sharing”, as Francis Wangusi, the director-general of the CA, was quoted by local media as saying in April 2014. Safari-com shares infrastructure, such as base stations and spectrum, under certain commercial agreements, as well as mobile money agents.

Fixed Line

This rise in mobile penetration coincided with a decline in fixed-line presence. Figures from the CA show a 56.3% decline over the financial year 2014/15, with subscriptions down from 201,233 lines in June 2014 to 87,774 in June 2015. The CA attributed this drop to the termination by Orange of its fixed wireless service that quarter, shifting its existing subscriptions to a GSM post-paid service. Terrestrial wireless data and fibre-optic data subscriptions have both risen from the first to second quarter of 2015, with the former experiencing 9.7% growth and the latter with 6.5%. Meanwhile, in May 2015, Access-Kenya Group rolled out a “metropolitan fibre-optic network” covering Nairobi, Nakuru and Thika. This contribution to the country’s broader ICT infrastructure capacity is part of a $3m investment drive to provide fibre-optic connectivity and more robust bandwidth to 18 towns by 2016.

Gateways

The CA noted tremendous growth in available international internet bandwidth, which rose from 847,464 Mbps in June 2014 to 1.67 Gbps in June 2015, up 96.9%. According to the CA, this can be attributed to The East African Marine System, which provided added capacity to meet growing demand. A similar annual rise of 80.9% was seen in the available international undersea internet connectivity bandwidth, which stood at 788,300 Mbps in June 2015.

Outlook

The outcome of the debate over market dominance will have a bearing on the vibrancy of the mobile money subsector. Meanwhile, the rise of 4G and 4G LTE service, and growing uptake of smartphones, is set to drive future growth. The technological and infrastructural environment is expected to become more conducive to higher penetration rates of mobile coverage and better internet access. How these investments are met with returns will be affected by the outcome of the regulators’ decision on Safaricom’s position, which will also likely determine if the market will have room for more competition.