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Safaricom Data: Are huge investments and low returns leading to desperation? Dennis Mbuvi

July 23, 2012
Safaricom Modem

Faced by a stall in growth of voice revenues, Safaricom has been driving growth of its data revenues. The 2012 financial year saw Safaricom’s voice revenues grew 9 per cent from a decline of 1.7 per cent in the previous year while data grew at 23 per cent from 80.3 per cent in the previous year. Total revenue grew 13 per cent to Ksh 107 billion.

However, like other mobile operators in the world, Safaricom is facing a problem where despite huge growth in data revenues, they still do not amount to much of the total revenue. The growth also comes at a huge cost as data networks require much more network investment than  voice networks.

Voice still accounted for 66 per cent of Safaricom’s revenue in the previous financial year compared to data at only 8 per cent. Meanwhile SMS revenue contributes 7 percent to the total revenue while M-Pesa contributes 16 per cent, all adding up to about 29 per cent.

Data subscribers meanwhile grew 31 percent from 3.5 to 4.6 million representing 25 per cent data penetration. A quarter of Safaricom’s total customer base is therefore contributing less than 10 per cent to their revenue base in terms of data consumption.

Safaricom has 1439 3G base stations versus 2690 base stations in total, 54 per cent of their base stations are 3G. The number of base stations increased 8 per cent over the year.

Safaricom says that main expenditures in the year was “fixed data, 3G equipment, fibre, and the upgrade of  existing 2G coverage to support the growth in customers” , which means that a lot of its capital expenditure may have been directed towards data.

CAPEX was 24 per cent at Ksh25.28 billion down 3 percent from previous years Ksh25.48 billion. Full year financial show about 10 per cent of CAPEX going to 3G network versus 20 per cent on 2G and more than 40 per cent on “Network Operations”.

Safaricom’s problem is mostly compounded by a decline in voice rates from Ksh8 to Ksh3 in September 2010, though this has now gone up to Ksh 4. Meanwhile subscribers grew 11 per cent up from 8 per cent to 19 million.

According to March 2012 operator filing to the Communication Commission of Kenya, voice minutes are a decline on a quarter by quarter basis, currently at 77.7 minutes for all operators with a peak 89.3 minutes per subscriber in the July to September 2011 quarter. Safaricom reported voice minutes increasing from 60 to 96 per subscriber in its 2011 financials.

The above statistics show Safaricom’s recent shift in data strategies, where its customers are accusing the operator of being high handed in data tariffs.

November 2010 saw Safaricom start to offer double the bundle sizes it offered such that the same price that got you a 50 Megabyte bundle would now get users a 100 megabyte bundle.

July 2011 saw Safaricom introduce weekly and monthly “unlimited” data bundles. The bundles were capped at certain speeds but lasted through the stipulated time period.

However in April 2012, Safaricom took an about turn on unlimited data bundles. After attending Connected Kenya, Safaricom CEO Bob Collymore said that based on complaints at Connected Kenya, he noticed that a few users on the “unlimited” offerings were consuming more than 70 per cent of Safaricom’s data and downgrading services for others. This he said was unacceptable, and the policy would have to be renewed.

The move caused uproar among Safaricom data users.

In June 2012, Safaricom moved its data billing to a Convergent Billing Solution (CBS). Amongst changes silently introduced was that data bundles now had a “hard” expiry. Data bundles of 1.5 GB were now not renewable after 30 days, compared to before; this means that if you bought a 1.5 GB bundle and used only 100 MB in 30 days, you would lose 1.4 GB. The situation before was that any data bundle bought in the next 90 days after expiry would unlock the unused 1.4 GB.

The move caused an even bigger uproar as evidenced by this post by iHub’s Erik Herseman http://whiteafrican.com/2012/07/18/how-safaricom-steals-your-internet-bundle/

Herseman’s post prompted Safaricom to review some of their controversial policies, notable that you can now top up a data bundles before expiry and the total bundle will now take the “life time” of the new bundle. Before this, a top up could not help redeem a bundle after expiry. 

Safaricom is now facing problems faced by other operators in markets where voice usage has matured to data usage. 

After lots of investments in data network roll out, mobile operators face the harsh reality that revenues are not as lucrative as voice or SMS. It doesn’t end there; it gets worse for both users and mobile operators.

According to the Cisco® Visual Networking Index (VNI) Global Mobile Data Traffic Forecast for 2011 to 2016, worldwide mobile data traffic will increase 18-fold over the next five years, reaching 10.8 Exabyte per month -- or a rate of 130 Exabyte per year  -- by 2016. An annual run rate of 130 Exabyte of mobile data traffic is equivalent to an increase equivalent of :

• 33 billion DVDs.

• 4.3 Quadrillion MP3 files (music/audio).

• 813 quadrillion short message service (SMS) text messages.

Middle East and Africa will have the highest regional mobile data traffic growth rate with a CAGR (Compound Annual Growth Rate) of 104 percent, or 36-fold growth.

The expected sharp increase in mobile traffic is due, in part, to a projected surge in the number of mobile Internet-connected devices, which will exceed the number of people on earth (2016 world population estimate of 7.3 billion; source: United Nations). During 2011−2016 Cisco anticipates that global mobile data traffic will outgrow global fixed data traffic by three times.

An Exabyte is a unit of information or computer storage equal to 1 quintillion bytes. (more on the Cisco VNI here http://www.cio.co.ke/news/main-stories/Africa,-Middle-East-to-have-highest-regional-mobile-data-growth-in-next-5-years/)

Meanwhile, operators are now considering either billing subscribers according to what sites they access, or billing content providers such as Facebook or Google for the content accessed by users.

Netflix, a service that allows you to stream movies on demand at a fee, is already kicking a storm in the United States of America with net neutrality rules. Comcast, one of the ISPs in the USA has been accused of downgrading Netflix traffic while giving priority to Comcast services. In addition, Comcast is accused of giving wide leeway on usage caps to its own traffic while restricting traffic due to “outside” services such as Netflix.

Cisco predicts mobile video will comprise 71 percent of all mobile data traffic by 2016.

Mobile operators are not even through with investing in 3G networks, but are now expected to fork out more cash for 4G networks. The government has just announced a consortium of nine firms, including Kenya’s four mobile operators, to roll out an open access 4G LTE network. Each is to contribute to the cost of the network, much in the same way that The East African Marine System (TEAMS) operates. 

Meanwhile, Nairobitech reports that Ericsson has offered to built the same network for free, probably to counter competitors Alcatel/Lucent and Siemens who are part of the consortium. (http://nairobitech.blogspot.com/2012/07/ericssonalcatel-battle-for-kenyas-4g.html)

Open access networks pose a challenge to mobile operators, they allow third party providers to compete alongside them. The problem, such their party operators are not faced with as many costs as an operator such as Safaricom, meaning they can compete at lower prices. 

Therefore, while the proposed 4G LTE model offers a cost reprieve for mobile operators, it opens the field up to stiffer competition.

LTE can be used to offer voice services. MTN has for long tried to make an entry into Kenya's mobile arena, and may do so through the consortium.

4G LTE  may also see Yu jumping from only offering 2G services to 4G, bypassing the US $ 10 million cost of 3G licenses. 

While higher data consumption is certain, it remains uncertain if operators like Safaricom will make as much as they did on voice without forcing you to dig deeper in your pockets. Kenya’s unique 4G roll out model may be a silver lining for consumers and a tight rope for mobile operators to walk on. 

 
 
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