Telkom Kenya CEO Mugo Kibati Clarifies Merger Deal with Airtel and State of Market Dominace

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Mr. Mugo Kibati
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Telkom Kenya CEO Mugo Kibati has clarified some issues surrounding the operations and plans of the operator on its path towards growth. The carrier, which has been making its business as attractive as possible to customers via a series of investments and launch of appealing products is third in terms of the number of active subscribers it commands, behind market leader Safaricom and Airtel. Telkom is still pursuing a merger deal with Airtel that was first announced a couple of months ago, although more details have not been revealed ever since (more of that in a moment).

The highlights of the carrier’s current position, which also explored Safaricom’s possible market dominance were discussed in an interview staged at NTV Kenya studio.

State of expiring data bundles

Former Kiambu County Governor William Kabogo has been mounting pressure on carriers to drop expiry dates for data bundles. This is not the first time such a suggestion has been made. In the past, customers have expressed their distaste for a short expiry window for data products, which, according to them, should not have a sell-by date.



It turns out that the matter is more complicated than a lot of users are ready to admit. While the correlation to expiry dates for perishable goods that is peddled in support of the current state of mobile data bundles is not entirely accurate, it sheds some light on why carriers expire your costly data nuggets. Telcos call it ‘breakage,’ which can be described as a service or product that a subscriber pays for, but does not use. Basically, if you purchase a weekly 500 MB bundle and use half of it, the other unused half is ‘breakage.’

“Bandwidth is a service that exists when it does. It is not like food that you can store in a fridge or cupboard,” says Mr. Mugo. “Bandwidth costs us whether you use it or not. It is not analogous to food commodities.”

One can argue that the explanation given by CEO Kibati is not satisfactory because the expiry date model for data bundles, which is essentially a ‘use it or lose it’ approach does not exist for other utilities such as electricity. Why is it acceptable for data bundles?

Nevertheless, Telkom has been expanding 4G and 3G coverage in the last couple of months that cover a good number of towns in the country. In the previous seven months, the operator has spent more than 1 billion shillings to extend high-speed internet access areas.

State of the Airtel-Telkom merger

Telkom and Airtel Kenya have been under the shadow of Safaricom for a very long period. While Safaricom makes billions of shillings from one financial year to another, other players, mainly the aforementioned two, continue to struggle to make ends meet. Both launched 4G services years after Safaricom had rolled over LTE. Airtel, for instance, was involved in a legal tussle with the Communications Authority of Kenya (CA) regarding the payment of KES 2.5 billion 4G licensing fees. The Indian-owned operator argued its operations were not as profitable as Safaricom’s to guarantee the hefty frequency fee. These concerns have since been raised to force the CA to declare Safaricom, a dominant player.

The merger is part of a solution to wage fair competition against Safaricom in terms of service delivery and innovation. It is also worth noting that Airtel and Telkom customer base is approximately half what Safaricom commands.

“The merger talks are still progressing. Before we announced the development, we had been in discussions with Airtel for a while. We have since moved to the next phase by engaging the regulators for approval,” says Mr. Kibati.

The CEO adds that the approval process will be concluded in the next few months.

Dominance

As mentioned above, the issue of dominance is hardly new in the Kenyan telco market. It has been pursued for an extended period by regulators, including the CA that sought the services of Analysys Mason that reported its findings and recommendations more than one year ago. The matter, which has seen input from key telco CEOs has also been tabled in Parliament for further scrutiny. More details can be read here, but in a nutshell, small players want Safaricom declared a dominant player so that measures can be instituted to level the ground for all participants. Ultimately, the customer will benefit by accessing affordable products and services at a competitive price.

“The issues of dominance has not been brought up by Airtel and Telkom. It is a fact that we are in a market that has a dominant player,” noted Mr. Kibati.

Quarterly statistics report from the CA continue to echo this statement: while all carriers are growing their customer base, Safaricom has an edge, and this can be seen in other areas such as mobile money subscriptions and the number of mobile money agents that dwarf what Telkom and Airtel have.

The CEO adds that even if the Airtel-Telkom merger goes through, where the two companies will reportedly create a new joint venture for carrier businesses, they will still be responsible for 10 percent of the revenues derived from the telco market, whereas the dominant player (Safaricom) is at 90 percent.

“The debate about dominance and what needs to be done should change. We need to look into the future and figure out how to structure the telco market so that the consumer benefits. And clearly, we need a much more competitive space such as regulatory relief that does not harm any players,” adds Mr. Mugo.

In the past, Safaricom, through its CEO Bob Collymore has argued that it should not be punished for being successful. CEO Mugo, on the other hand, differs with the statement.

“The idea is not to bring down a dominant player. Whatever we come up with should be mutually beneficial to all players, and allows for a competitive scenario for which the consumer benefits from value for service and innovation,” replies Mugo Kibati.

Regulatory relief

Mugo further details the form of regulatory belief he wishes were in place to spur growth for small carriers, although his goal is to devise a solution that should work with all players.

Anyway, Mugo asserts that mobile termination rates should be scrapped because they make a significant dent on Telkom’s revenues.

“We pay hefty termination fees to each other. However, the challenge is that we pay a lot more to the dominant player. A simple relief in these fees, which cannot harm the dominant player, can allow us to invest that money into network expansion,” he says.


Mugo adds that lack of fair competition affects that scope of the Universal Service Fund (USF), especially as to what constitutes commercially viable areas that are in dire need of network expansion.

“If we had strong players who are able to compete with each other and innovate, they would be forced to go for marginally and commercially viable customers, and that will expand coverage tremendously,” adds Mugo Kibati.

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