shsq-kenya
Background
The Republic of Kenya is an East African country, sharing borders with South Sudan and Ethiopia in the north, Somalia in the east, Uganda in the west, Tanzania in the south-west and with access to the Indian Ocean in the southeast of the country.
With a population of 41.8 million people (source: Kenya facts 2014) and a GDP of US$20.6billion, Kenya is the biggest economy in eastern Africa and one of the top ten countries driving the economic growth in the continent. However, Kenya is also in the top 10 of the most unequal societies in the world, with the richest 10% owning more than 40% of the land and resources, and the poorest 10% a mere 1% (source: Pulling Apart, Facts and Figures on Inequality in Kenya).
Market
Mobile telephony and internet services grew in Kenya from their establishment in the early 1990s, but suffered from a lack of development. This was a result of poor competition, and the difficulties that the state operator, Kenya Posts and Telecommunication Corporation (KPTC, now Telkom Kenya/Orange), had in funding telecoms infrastructure.
Kenya mobile market shares at end 2013
The Kenya Communications Act expressly forbids the existence of either a monopoly or a duopoly in the telecommunications sector. However the introduction of a second mobile operator led to market competition resulting in (some) price reductions and increased penetration % in just one year.
In 2008, two additional mobile operators entered the market with a third license awarded to Econet Wireless Kenya (EWK), which later became Yu (Essar Telecom) and a fourth awarded to Orange (Telkom Kenya). This simultaneous launch triggered a price war, which quickly reduced Average Revenue Per User (ARPU), forcing operators to look for new sources of revenue such as mobile money services. First launched in Kenya in 2007, today 25% of the country’s gross national product flows through the M-Pesa mobile money service operated by Safaricom.
Today the telecommunication sector in Kenya represents 9.1% of the GDP or US$ 3.8 billion (source: Kenya facts 2014). While GDP growth has been declining since 2010, the telecommunication sector remains the third strongest industry with an annual growth of 6% (as of 2013).
At the end of 2013, there were 31.31 million subscribers, giving a penetration of 70%, slightly below the African continent average penetration but one of the leading countries in Eastern Africa, which averages just 40% penetration. Consumer subscriptions are dominated by pre-paid SIMs representing more than 99% of the market. Since the introduction of the 3G by Safaricom in 2008 (but now offered by all operators), 3G subscriptions have reached 3.5 million by the end of 2013. Safaricom has trialled 4G LTE, but shortly after the government announced plans to implement a public-private partnership (PPP) to create a national ‘Open Access’ LTE network by 2013. No agreement has yet been reached on this.
Safaricom dominates the market with 68% of the market share, followed by Airtel (Bharti Airtel), Orange (Telkom Kenya) and YuMobile (Essar Telecom). Despite a slow decrease in market share over the last 5 years, about -1% CAGR, Safaricom market dominance is expected to continue.
Due to aggressive market pricing, YuMobile has been struggling since its entry into the market, and in March 2014 it confirmed rumours regarding a market exit, with the divestment of its infrastructure to Safaricom and the acquisition of its customer base by Airtel.
Soon after, several reports emerged hinting at Orange’s intention to leave the market. The company’s financial health, its lack of profit in nearly seven years, as well as its recent exit from the Uganda market seemed to further support this. However Orange’s investments of US$280million to support the rollout of 3G across the country, expand its national optic fibre backbone and launch a Multi-Service Access Node (MSAN), and the recent replacement of its executive staff, make it difficult to be certain that Orange will exit the Kenyan market.
Infrastructure Sharing
With low ARPUs and stiff price competition, operators are facing difficulties in funding the modernisation and expansion of their networks. Consequently they have been looking at lowering costs through independent tower firms managing their tower portfolios.
Since its creation the CA has actively promoted infrastructure sharing, with clear requirements in the Communications Regulations Act. The first tower sharing in Kenya was agreed in April 2009, providing for Airtel to share around 300 base stations with YuMobile over the next 15 years.
In June 2011, Safaricom and Orange announced their plans to form a jointly owned, independently managed infrastructure company, but little information came out regarding this agreement.
In June 2013, Eaton Towers became the first tower operator in Kenya signing a 15-year agreement with Telecom Kenya (Orange) to manage a portfolio of 1000 towers. But the contract was reportedly cancelled in mid- 2014 due to the financial uncertainties around Telkom Kenya’s future and the recall of Orange’s Kenyan management team.
A few months later, Eaton announced the acquisition of over 3500 telecommunications towers in 6 countries across Africa from Airtel. Various public sources indicate that this includes Airtel’s portfolio in Kenya.
Conclusion
If the 4G PPP proceeds, the MNOs may make their tower sites available under a shared-infrastructure model. This could stimulate operators to sell or leaseback more towers in the future and could offer opportunities for tower operators.
The Kenyan market is certainly an attractive market for tower operators at the moment, due to its market size, number of operators and current economic health. But the recent announcements of a YuMobile market exit and the uncertainties around Orange’s future in Kenya could dramatically impact the communication market leaving Safaricom and Airtel in a duopoly-like set up. This in turn creates a level of uncertainty.
