What hapened to Flashcom and Popote Wireless?
Business Post Magazine – August 2011
Who killed local loop operators? Little is heard of Flashcom and Popote Wireless despite investments of close to a KSh1 billion. BY GUCHU NDUNGU
On a cold June morning in 2006, this writer had an assignment to interview a senior executive of the hottest investor in town, EM Communications Limited. The company had been awarded a license as the first local loop operator (LLO) in Kenya and traded under the name Popote Wireless. The mood was ecstatic. Media interviews were being carried out in the company’s boardroom and local and foreign reporters trooped in and out of the massive room each eager to interview Eric Muthi, the managing director of the company.
The boardroom faced the Nairobi National Park and, Mr Muthi observed: “We are like this park. There is plenty of opportunity but within it also lurks dangers.” Five years later, Popote is no more and efforts to trace it have been unsuccessful. The dangers seem to have overcome the opportunities. And it is not just Popote Wireless. Another local loop operator that was also licensed about the same time was Flashcom, which though still operating, is struggling.
Local loop operators (LLOs) were issued with nationwide licenses to increase access to fixed lines, popularly known as landlines and expand last mile access. The license conditions however limits their on-net traffic to a geographical area and any traffic going outside the area has to be carried by a fixed or mobile national operator.
The businesses were attractive largely because Telkom Kenya was then an inefficient, lumbering state monopoly that took forever, if ever, to connect subscribers. It had a long waiting list of potential customers, most of them desperate for connectivity.
For the LLOs, this was a market ready for the taking. So big was the opportunity that the Communications Commission of Kenya (CCK) licensed 24 LLOs although only Flashcom and Popote Wireless launched operations.
In retrospect, the licences were a poisoned chalice. While both firms took off with great fanfare and promise to transform telecoms, their efforts have come to naught and they are now relics in the telecoms landscape, occupying the same corner with the red telephone booths, community phones and fax machines.
At one point, there were reports that Popote Wireless had diversified into business process outsourcing. Several months later it was accused of fleecing job seekers by promising and charging them for non-existent jobs. It was an ignominious end for a firm launched with such great promise.
Flashcom is still in business and is based at Barclays Plaza. But the firm’s business has been declining and CCK no longer includes it in its quarterly reports. Julius Kinyua, the chief executive officer says “the business environment has been tough”. That is an understatement. From license limitations, technology changes, a less than supportive regulator and a recovering Telkom Kenya, the odds were stacked against LLOs right from the start.
Mr Kinyua says LLOs had problems negotiating inter-connect rates with then state owned monopoly operator as it viewed them as competitors out to grab its subscribers.
The operator routinely refused to connect LLOs’ traffic to other operators, arguing that the networks were incompatible. “For almost one year, we could not connect to other networks and this complicated our voice business.”
Thereafter, Telkom changed the interconnect rates making off-net calls unviable. Its subscribers could only make calls within its network.
To roll out their services, LLOs and Telkom Kenya were allowed to use Code Division Multiple Access (CDMA) technology. But when the spectrum was allocated, the LLOs received higher frequencies with shorter reach than Telkom. For instance, Flashcom was allocated 1900 MHZ while Telkom got 800 MHZ.
The reach of the frequency notwithstanding, it also meant that the LLOs required more base stations to roll out its services, thus increasing their capital outlay. To maintain its bases in Nairobi, where it operates, Flashcom needs KSh2 million monthly. And since the frequency that it was allocated is not widely used, handsets were rare or of poor quality.
Then in 2008, Telkom Kenya was privatized. The new management was more open to negotiations about infrastructure and interconnection rates. But the “sleeping giant” had also woken up and aggressively protected its subscriber base. It became better at connecting new customers and improved customer service. With new capital from France Telkom, the operator established shops across the country to sell CDMA lines and courted customers with lower tariffs.
The LLOs’ business model, which was hinged on Telkom Kenya’s inefficiencies fell flat on its face even as Telkom’s fixed line, now called Orange fixed wireless, recovered. In 2006, for example, Telkom had 10,685 fixed wireless subscribers and the number has now grown to 154,161according to the latest CCK quarterly report.
Telkom Kenya, it appears has grown its business at the expense of the LLOs. “LLOs took a big risk by assuming Telkom would never recover,” a senior Telkom Kenya executive said on condition of anonymity. It was a big bet that failed to pay off. It is estimated that investors sunk KSh300 million into Flashcom and KSh500 million into Popote Wireless.
Mr Kinyua says Flashcom is exploring ways to reinvent the business with focus on data services. Margins in the voice business have hit rock bottom and can no longer support its operations.
The income from voice is negligible: the LLO keeps KSh0.17 cents of the KSh2.38 per minute it charges its subscribers to call other networks. “In the voice segment, small operators basically work for the big operators,” he observes wryly. “The future lies in the data segment.”
The firm has been handed a new lease of life by CCK’s decision to give telecoms operators unified licenses, allowing them to offer a wide range of converged services. “One of the strategies we are looking at is becoming a niche operator offering data and fixed telephone services.”
The question is whether investors will be willing to put their money in the business given past experience and the massive size of competitors in the data segment, most of whom hold similar unified licenses.