Business Post – March 2011
Did Yu call the wrong number?
Why Kenya’s youngest mobile operator is stuck in a rut
BY GUCHU NDUNG’U
The latest Communication Commission of Kenya report offers an unflattering insight to the fortunes of Yu, the fourth
mobile phone service provider: the operator is losing subscribers at an alarming rate. In the last quarter of last year, the number of subscribers on its network dropped by 300,000 from 1.49 million to 1.46 million.
Ami Chaturvedi, Yu’s Chief Executive Officer dismisses this as a “blip” that is to be expected. “Before August 2010, we were the value drivers in this market. Many consumers bought our lines to call other networks. When other networks lowered their rates to our levels, we lost some subscribers leading to the slight dip in numbers.”
Yu, owned by India’s Essar Group, is finding itself in a tight corner. Launched with the promise of offering affordable calling rates, it has seen its value proposition snatched from right under its nose by Airtel, its well heeled rival now considered the call rate trendsetter.
Tariffs have in the last six months dropped by more than 70% from KSh8 to KSh3. Presently, a fierce price war precipitated by Airtel’s strategy of lowering call rates to the bare minimum is underway. Safaricom and Orange have bitterly complained that the low tariffs are unsustainable and will lead to loss of jobs and under investment. Their lobbying has seen the issue come up in Parliament, prompting Prime Minister Raila Odinga to form a taskforce to look at the effect of prices in the industry. The taskforce is expected to give its recommendation in mid March.
Mr Chaturvedi says the current price war is healthy. “It will force rivals to compete on quality and customer satisfaction,” he says. “As long as the business is focused, it will add more subscribers and retain existing ones. I believe we can be profitable at these prices.”
Industry dynamics, especially competition and regulations are now operators’ biggest nightmares. Nothing illustrates this better than Yu’s operations since its launch in 2009. Initially, it planned to use a low cost model hinged on several pillars.
It hoped to use outsourcing to reduce the cost of rolling out its network and started by handing its non-core activities like call centres to third party providers. It also hoped to share infrastructure with other operators giving it an instant countrywide presence.
Its strategy appears to have run into headwinds. Aegis, a subsidiary of Essar Group that was contracted to handle call centre services has been kicked out. The operator has now hired Horizon, a local business process outsourcing firm to offer call centre services.
Mr Chaturvedi says sometimes outsourcing is not always cheap. “It can be expensive in the first 18-24 months with savings kicking in thereafter.”
Persuading its rivals to share infrastructure has also proved difficult. Initially, it expected to save upto 50% on capital expenditure and 30% in operating expenditure. Other operators have however been less than enthusiastic about the value of sharing their networks, often a competitive edge. “Our competitors know the value of sharing infrastructure but their decisions are often driven by personal egos,” he laments.
Sharing infrastructure reduces operators’ costs and conserves the environment as fewer towers are built. With the entry of Airtel, a firm believer in shared infrastructure, things are starting to change. There are reports that Telkom Orange and even Safaricom are starting to take requests to share infrastructure seriously.
Despite its strategy’s mixed success, Yu is still committed to a low cost model. “If I put up a tower that costs KSh1 million a month to operate and it produces one million minutes, I can sell one minute at one shilling. However, if the tower can generate five million minutes, I can sell each at 20 cents and still recover the investment.” The challenge is however how to generate those minutes.
Yu has tried hard to keep its costs low. According to figures from Synovate, the research firm, last year it spent less than a tenth of what Safaricom spent on advertising, with its spend dropping to KSh527 million from KSh719 million in 2009. Safaricom’s spend rose from KSh1 billion to KSh5.7 billion during the same period while Airtel spent KSh1 .9 billion.
Its frugality has not helped its image with many analysts viewing it as a sign of a struggling operation rather than as a smart way to build the business. Even worse, it has undermined its relationship with service providers. Last year, it was edged out of Ogilvy Group after the advertising and public relations group signed up the bigger Airtel account.
“Its spending pattern especially on marketing does not inspire confidence in its subscribers or vendors,” says one industry executive. “How can you be handing out flyers when your rivals are visible in almost every media outlet?”
Yu’s troubles may also be due to its failure to properly gauge the market. It has stubbornly targeted the youth market despite the segment’s lack of brand loyalty and spending power. Two years since it launched, it is yet to come up with compelling offerings for lucrative segments such as corporate and post paid subscribers, even within the youth market.
It has also taken a dim view of the data market. While rivals are waxing lyrical about the end of voice as a major revenue contributor and are busy exploring new revenue sources, Mr Chaturvedi still believes voice is king. Currently, voice accounts for about 90% of revenues.
“Let us stop living in a fool’s paradise,” he warns. “Even in developed countries where internet access is widespread and 4G networks are available, voice still contributes over 75% of revenues. People buying phones for the first time use them for voice not data.”
His main concern is that data can also be delivered on a multitude of technologies including WiMax, CDMA and fibre optic cables, making it a fragmented revenue source. Voice on the other hand can only be conveniently and cost effectively delivered via mobile phones.
“Investing in 3G at this point does not make a lot of economic sense,” he says adding that it would double the operator’s level of investments. Yet, only about 10% of subscribers own 3G-enabled handsets. “We don’t want to make such an investment for egoistic reasons.”
His peers have a different view. Safaricom is busy upgrading its 3G network and conducting technical trials of 4G technology. Orange and Airtel have been testing 3G networks, which they plan to launch in the next six months.
Yu is focused on 2.5G technology that is cheaper to roll out and does not attract hefty license fees. The technology could deliver data services at affordable rates but it is much slower than what competitors are deploying.
For Mr Chaturvedi, the time to invest in high speed data networks is when penetration of 3G handsets goes beyond 50% or they cost less than KSh5,000.
“Our target market uses mobile internet for browsing, e-mail and search, functions that 2.5G technology can comfortably handle. Our goal is to offer data services at cheaper rates than competitors.” Presently, subscribers pay KShs99 per month for an unlimited internet access if they buy one of the “bundles” on offer.
The company plans to introduce products that encourage usage of its data services including infotainment, subscription and money transfer service, which has over 600,000 registered users.
Playing with giants
If Yu is to have a realistic shot at becoming a successful network, it will have to become better than its rivals at reaching out to consumers and gaining their trust. Still, there is a real risk that it will continue to play in the shadows of its bigger rivals. Its capital expenditure pales in comparison compared to what Safaricom and Airtel have lined up.
Bharti Group, the owner of Airtel has left no doubts about the lengths it is ready to go to win over subscribers. It is unlikely it would want to see an operator owned by arch rival Essar Group threatening its market share in Kenya.
Voice is also not what it used to be. According to CCK, average revenue per user now stands at KSh362.20 compared to KSh425.85 in 2007 and KSh376.5 in 2008. Analysts expect ARPU figures to decline significantly due to the reduction in call charges.
And with interconnection rates set to fall further from KSh2.21 per minute to KSh1.44 by July this year, operators’ revenues will be under severe pressure. The small operators will be lucky to survive.
Luckily for Mr Chaturvedi, he will not be around to witness the devastation. At the end of March, he is set to leave Essar Telecom Kenya “to take up other assignments”.
He will be replaced by Madhur Taneja, who is presently chief executive officer of Warid Telecom, an operator with operations in Uganda and Congo. Warid Telecom’s operations in the two countries are owned by Essar Group 51 % and Dhabi Group.
Will Mr Taneja fare any better? Yes, if he brings with him a war chest and fresh thinking.