Safaricom – Competing through direct and indirect network effects
Safaricom – Strategy execution or Monopoly? Should the Government save the competition?
The court case “for the consumer”
In January 2015, Airtel (Safaricom’s nearest competitor) filed a suit with the Competition Authority of Kenya to declare Safaricom anti-competitive and dominant. Airtel asked the court to ban Safaricom’s practice of charging lower rates on its in-network calls. Airtel also asked the court to direct Safaricom to pay a higher termination fee for calls ending in competitors networks. Currently the termination fee was $0.01 per call across all networks but Airtel wanted Safaricom to pay a disproportionately higher fee (to competitors) $0.02 (double!) per call “to level the playing field”due to its competitive position. These actions would arguably enable competitors to compete with the end benefit of this competition accruing to the final consumer
Safaricom argued that it shouldn’t be punished for successfully executing on its strategy and gaining high market share…..the Jury is still out
Safaricom business summary
Safaricom is the leading mobile phone network operator in Kenya. The company has 67.4% market share versus nearest competitors Airtel and Orange with 22.6% and 10% market shares, respectively. The company also owns and operates M-Pesa which is the nation’s largest money-transfer service. In 2013, 43% of Kenya’s GDP flowed through M-pesa.
Competing through direct networks
Safaricom uses direct networks to attract and maintain consumers and to keep competitors at bay.
On the consumer side, Safaricom charges less for in-network calls and offers a “please call me” free text messaging service. Safaricom to Safaricom calls (“in-network” calls) cost KSH 3 ($0.03) a minute while out-network calls i.e. Safaricom to “other network” calls cost KSH 4 ($0.04) a minute. In a mostly low income, highly price sensitive African market, this creates a great incentive for families, friends and other social groups to all be on the same network. The Kenyan market is also characterized by a lot of “flashing”. Flashing is when a caller calls another person to alert that person that they want to talk but disconnects the call hoping the other person will call them back. People do this to save on their pre-paid airtime minutes. Recognizing this trend and need, Safaricom released a free text message that simply reads “Please call me”. This text message is only free in-network i.e. between Safaricom users. This also greatly incentivizes groups to join and stay in the Safaricom network. It has also encouraged parents to give mobile phones to their children without the worry of escalating telecom bills
On the corporate side, Safaricom charges competitors “Termination Rates”. For every call that ends in the Safaricom network i.e. “out-of-network” caller to Safaricom subscriber, Safaricom charges the competitor 99 Kenya Cents ($0.01). Due to its high market share, Safaricom collects money on almost every call in the country. Competitors have also complained that when they reduce tariffs to woe customers, Safaricom increases the termination rates, driving them to unprofitability.
Competing through indirect networks – MPESA
In 2007, Safaricom launched M-Pesa to cater to the financial needs of the un/under banked population through its mobile platform. The Company noticed that the penetration of mobile phones far exceeded the penetration of formal financial services and grasped the opportunity to differentiate and win customers for its telecom business. Through M-Pesa, customers can deposit and withdraw up to $1,000 from their Safaricom mobile phone accounts, send money to other people on M-Pesa, pay-bills and access micro-credit. In 2007, 20% of Kenyans living on less than $1.25 a day used M-Pesa. In 2013, the number had risen to 72% and M-Pesa had spread from being a tool for the “lower classes” to a utility used by virtually all Kenyans. In 2013, 43% of Kenyan GDP flowed through M-Pesa with M-Pesa processing 237 million person to person transactions.
While, M-Pesa is now available to subscribers on all networks (Safaricom eventually opened up the offering to all mobile networks), it is still widely associated with Safaricom with a lot of people thinking that you can only get M-Pesa through Safaricom. Every promotion for M-Pesa includes the Safaricom logo and brand driving further awareness of Safaricom versus competitors.