It cost two young, bright companies millions to grab a slice of Africa’s hottest telecommunications market. But now they are both limping and left out. What went wrong?
It was a cold June morning in 2006 and Kenya’s telecommunication sector was buzzing. EM Communications Limited had just been awarded a license as the second local loop operator in Kenya, trading under the name Popote Wireless. The company had just invested almost $6 million in rolling out operations and the mood was ecstatic. Reporters trooped to their glistering headquarters in Nairobi, each angling to interview the company’s managing director, Eric Muthi, in his boardroom overlooking Nairobi National Park.
“We are like this park. It has a lot of opportunity but within it also lurks danger,” he said. It turns out there were more dangers than opportunities.
Local loop operators (LLOs) are small telephone operators with a nationwide license, set up to increase access to fixed lines offered by state-owned Telkom Kenya. The plan was to give callers connections in their own district, but the problem was that if you wanted to call further afield, you had to go back through national operators.
Back then, Telkom Kenya was an inefficient state-owned monopoly that took months, if not years, to connect a subscriber. This led to a long waiting list, keeping telephones away from the masses.
The Communication Commission of Kenya (CCK) thus licensed 24 operators. But of the 24, only Flashcom and Popote started operations. CCK told FORBES AFRICA that others were in the process of being deregistered, after failing to open up shop.
Flashcom invested $3.6 million; Popote $6 million. Initially, business was good. According to the CCK’s 2008 report, subscribers increased from 8,481 in 2006 to 10,312 by March 2008.
The growth was because LLOs had an advantage. While a subscriber could wait for months to get a Telkom line, they could walk into a Flashcom or Popote shop and walk out with one.
But more than five years on, the dangers Muthi warned of emerged snarling from the bush.
“Popote had ceased operations at some point due to internal challenges. However, they are now back, though in a limited scope,” says CCK’s acting director general, Francis Wangusi.
And it is not just Popote Wireless. Flashcom, though still in existence, is limping.
According to its CEO, Julius Kinyua, it has shed half of its more than 4,000 subscribers.
“It has been a rough business environment but we are determined to keep going,” he says with a chuckle. CCK no longer keeps count of LLO subscribers; the last time it did so
was in 2008. The regulator was unable to comment at the time of going to print.
How did two firms go from hot start-ups to examples of what can go wrong in Kenya’s telecommunication market in five years?
The privatization of Telkom Kenya dovetailed to the LLOs’ disadvantage, but other reasons were also at play.
“Inadequate investment, interconnection challenges, unavailability of spectrum, and more importantly, the market preference for GSM mobile communication systems were their undoing,” says Wangusi.
The first hurdle they faced was negotiating interconnect rates with the then fully state-owned operator, Telkom Kenya. According to Kinyua, Telkom considered them competitors; they refused to connect LLOs to other networks, saying that the networks were “not compatible”.
A Flashcom subscriber was thus unable to call other networks. This erased the efficiency advantage they had enjoyed.
“Then the agreed-upon interconnect rate with Telkom was changed to suit it,” says Kinyua. “It meant subscribers would only be able to call within its network and it became ‘an island’.”
For interconnection, LLOs were supposed to charge $0.12, out of which $0.08 would go to Telkom Kenya. The remaining amount, according to Kinyua, was too little to meet their expenses and make a ‘decent’ profit.
Also, the technology that the LLOs got was of higher frequency and thus lesser reach than the ones given to Telkom Kenya. Flashcom got
1 900MHz, while the state company got 800MHz.
“We thus needed more base stations to roll out our services, increasing our costs further in an environment where profit margins were minimal,” he says. To maintain its bases in Nairobi alone costs almost $24,000 a month.
When Telkom Kenya was privatized in 2008, the government ceded 60% of its shareholding to European telecommunication giant France Telecom. This was a bittersweet moment for LLOs. The new management was more open to negotiation and compromise on infrastructure and interconnection rates.
However, the sleeping giant had woken, threatening the LLOs’ business model. The entry of France Telecom injected more capital in Telkom and revitalized the formerly inefficient operator, which was rebranded as Telkom Orange. The days of long waiting lists were coming to an end.
Telkom Orange courted the customer aggressively and at cut prices. Its fixed wireless subscriptions soared from 10,685 in 2006 to 154,161, according to CCK reports.
“LLOs relied too much on Telkom Kenya’s inefficiencies. France Telecom changed all that. They had better change their modus operandi or they’ll sink,” says one telecoms analyst who requested anonymity as he works in one of the major firms.
Then in 2009, intense price wars in Kenya’s telecoms sector destroyed any advantage the LLOs had by halving call rates overnight.
When LLOs realized the tide was turning, they tried to change their business model.
Popote tried to venture into outsourcing but got its fingers burnt.
It was implicated in a fiasco that involved charging potential employees for non-existent jobs, by Kenya’s Business Daily in 2008. The company still holds the LLO license, and hopes for a buyout.
Flashcom, according to Kinyua, is looking beyond the voice and leveraging on the increased demand for data as the future business plan.
The decision by CCK to give telcos a unified license has given the firm a new lease of life and it is now banking on data for growth.
“CDMA (code division multiple access) speeds are like the 2.5G and very good for internet,” says Kinyua. The CEO hopes that advanced CDMA handsets that have modern features like cameras, internet connection and smart phones may turn the tide in the LLOs’ favor. But for now, it needs hope as much as technology to survive.