BMI: why Kenya could be next for tower sharing

Kenya is arguably the largest of the remaining mobile markets in Sub-Saharan Africa yet to see the uptake of independent tower-sharing services. However, some key market dynamics make the service almost inevitable to ensure that some operators in the market remain competitive and for a general improvement in network quality of service and coverage. The leading independent tower sharing firms operating in the region have all set their sights on the Kenyan market, which may finally yield to independent tower-sharing services in 2013.

Kenya’s mobile market reached the 30m mark for the first time during the three months to September 2012. According market data published by the Communications Commission of Kenya (CKK), there were 30.433m mobile lines in the country at the end of September 2012. This was a 2.5% q-o-q growth and 14.9% y-o-y growth, making it one of the fastest growing markets in the region. However, a considerable number of lines were not registered at the end of the latest mandatory SIM registration exercise in December 2012 and a grace period was granted by the regulator until the end of March 2013. The disconnection of these lines could push the country’s mobile penetration rate below the 70% mark it attained in September 2012, according to BMI data.

Safaricom remains the dominant player with a market share of over 63%. Airtel Kenya is in a distant second position with a market share of less than 20%, while Orange Kenya and Essar-backed YU Mobile are separated by less than 1ppt in their market shares, which jointly account for around a fifth of the mobile market.

Safaricom’s smaller rivals tried to erode its market share through intense price competition, which set off a brutal price war that ravaged the market for most of the last three years. The impact of this development on operators’ financial indicators, along with rising opex, has brought the need to improve operational efficiencies in the Kenyan mobile market to the fore. Although not independently confirmed, local media reports, citing key stakeholders in Kenya’s telecoms markets, suggest that only market leader Safaricom is in the black among the country’s four mobile operators, largely due to its scale and success of key non-voice services such as M-PESA.

Mobile network operators across Africa currently face the task of developing new revenue streams and reducing input costs in order to improve their bottom-line figures and remain competitive in the market. In Kenya, the focus over the past three years seems to be on driving revenue growth through voice tariff increases, as in the case of Safaricom, or through the rollout of non-voice high-value services such as mobile data and m-commerce services, as in the case of the three smaller operators. However, declining revenues from traditional voice services due to increasing competition and the sluggish take-up of high-value services due to low income levels make it inevitable for operators to look in the direction of reducing input costs as a means of improving their profitability.

One of the key strategies for efficiency improvement for most leading operators in Africa are tower-sharing deals with independent tower firms. Tower deals took off in Africa in 2011 and 2012 after a wave of price wars swept across most markets in the region. Surprisingly, Kenya, which is widely regarded as the source of the price war, is lagging behind other major markets in the region in the tower-sharing business.

The closest the country has come to tower sharing was an announcement by Safaricom and Orange Kenya in mid-2011 to form a jointly owned, independently managed infrastructure company to acquire and manage their portfolio of towers. There is no update on this development, although we would not be surprised if the operators are separately exploring alternative tower sharing options.

It is increasingly unlikely the Kenyan mobile market will buck the trend towards tower-sharing services for much longer. There are a number of factors expected to push the case for the market to open up to independent tower firms, possibly before 2013 runs out. Some of these factors, which will likely strengthen over time, are highlighted below.

Market average mobile ARPU in Kenya is below US$5 and is forecast to trend downwards over the five years to 2017, according to BMI data. Meanwhile, Kenyan operators have witnessed a steep rise in opex over the past three years, mostly due to external factors such high inflation, currency instability and high diesel prices. Although adverse macroeconomic factors that plagued the country in 2011 and early 2012 appear to have abated, according to BMI’s Country Risk team, network operators are unlikely to see a significant easing in opex. This, along with declining ARPUs, will further squeeze operators’ margins and strengthen the case for more aggressive cost-cutting measures, of which we expect tower sharing to be at the top of the list.

Kenya’s code of practice for the deployment of communications infrastructure is silent on the role of independent tower firms. Instead, it outlines a framework for operators to engage in site sharing or co- location. However, we do not expect the regulator to hinder the operations of independent tower firms in view of the potential for tower-sharing services to contribute to the faster roll out of network services to underserved areas and other operational targets set for the mobile market. The fact that there is no express prohibition of the operation of tower firms suggests that a framework for their services could be prepared once the country’s operators make significant moves towards engaging the services of independent tower firms.

Kenya is perhaps the most attractive ‘new’ market for the tower firms operating in the region and those looking for a foothold owing to the market size, the number of operators in the market and the country’s positive economic outlook, which will inevitably drive growth in the telecoms sector. Helios Towers was previously reported to be interested in the joint tower company proposed by Safaricom and Orange Kenya. The company, along with other leading firms including IHS and Eaton Towers, have been open about their desire to enter the Kenyan market. We believe competition by the tower firms for the Kenyan market will be a key factor in the conclusion of a tower deal in the mobile market.

There were concerns over the possible reaction of Western investors if the PNU won the March 4 2013 presidential elections due to the indictment of Uhuru Kenyatta and his running mate, William Ruto, for war crimes by the International Criminal Court (ICC).

BMI Country Risk team’s assessment of the situation is that the impact of Western action against Kenya would be far more pronounced if that action involved the imposition of sanctions that precluded Western companies and individuals from investing in and trading with Kenya. Europe remains an important market for Kenya’s horticulture industry and the source of a large proportion of the country’s tourists. Western portfolio and FDI flows also play a meaningful role in plugging Kenya’s large current account deficit. A reduction in these inflows would have a significant impact on the currency, inflation and macro stability generally. However, as things stand, the chances of sanctions being imposed are close to nil. That could change if Kenyatta reneges on his commitment to comply with the ICC process but there is little reason to believe that he is about to backtrack. On the whole, we believe that the election of an ICC indictee to the presidency is unlikely to have as meaningful an impact on the economy and investor confidence as some might fear.

Kenya’s four mobile operators have a combined towers portfolio of around 6,000 towers. This is grossly insufficient for the country’s population of almost 45mn and land area of around 570,000 sq km. Meanwhile, operators’ poor financial results over the last three years raise significant concerns about their ability and willingness to invest in new tower deployments to underserved areas, especially where ARPUs are likely to be lower than in major towns and cities.

All four network operators are potential candidates for tower deals in view of the market dynamics and factors mentioned in the previous section. However, Orange Kenya and Safaricom are the most likely to move first in the market, mainly because of their proposal to form an infrastructure company that may seek to partner with an established tower firm in the region. Furthermore, both companies are closely associated with operators that have adopted the tower-sharing strategy in other markets. Orange and Safaricom’s parent companies, Orange Group and Vodafone Group respectively, have implemented the tower-sharing strategy in some other markets in which they operate, including South Africa, Ghana and Uganda.

YU Mobile is close behind Safaricom and Orange as a likely candidate for a tower deal. The operator’s lack of 3G network services limits its ability to expand its high-value data offerings, making it almost entirely dependent on voice revenues. The operator is keen to invest in 4G LTE services when spectrum becomes available. However, this may not happen soon and it will need to aggressively reduce costs in order to remain competitive in the mobile market. For its part, Airtel Kenya is likely to follow a group strategy, which is yet undefined for tower sale and leaseback deals. The operator subscribes to the services of tower firms in other markets it operates and will likely do so when independent tower firms launch operations in Kenya.

www.businessmonitor.com/bmo