Nairobi Star Business reporter James Mbugua of Nairobi Tech spoke to Safaricom CEO Michael Joseph to get to the bottom of the trouble Kenya’s leading mobile telephone company is having with the Communication Commission of Kenya.

Why are you making such a fuss over regulation? Is regulation a bad thing?

Regulation is not a bad thing and we are not making a fuss about regulation per se. There are five of them, and we are only making a fuss about two of the regulations and indeed only one element of the regulation is what we are complaining about and making strong objection.

By the way it is not the first time we are objecting. We have objected from the very beginning because we have been consulted on these regulations for the last six months. We have no objection to being declared a dominant player because we clearly are by any measure. Once we are declared dominant, there should be a process of declaration of dominance but that’s a side issue.
What we are objecting to is that we should only be penalized, if we are abusing that dominance and that is what is not in the regulation. What happens with the regulation is that you are declared dominant by the CCK, without even investigation, and once you are declared dominant, you are now subject to price control. That’s it.

In other words we are going to be subject to price controls automatically even though we have not abused that dominance. That is our chief objection.

The regulation refers to economies of scale and superior technology as a form of unfair advantage. But some people would argue that capitalism is built on economies of scale and superior technology? What would you say about that?

We have economies of scale because we are big. We are bigger than the other competitors, but we have gotten there by our own achievement. We haven’t gotten there by some special favour or some specialdispensation. We’ve gotten there because we’ve employed the superior technology.

If you were the boss of one of the other telecom companies, do you think youcould become number one without help from the CCK?

I think Zain has been a victim of circumstances rather than not having strategy. They have had several ownership changes. They had the goal of being number one. In fact when Celtel came along, they said we will beat you within one year. We’ll be ahead of you. So you can theoretically beat us. Yes, it is difficult, but what are you doing in the marketplace to beat us? What are you doing? Where is the product? Why, right now, are customers still choosing

Safaricom by 70 per cent of all new additional customers? We are not the cheapest but they choose us because they want to be part of Safaricom – because of what we offer.

CCK would say they choose you because most of their friends are on Safaricom so it’s actually cheaper to be on Safaricom. That’s why they are coming to Safaricom. Isn’t that the CCK argument?

Yes but so what? This is a free economy.It is up to us to set the prices. If they are knowingly coming to us because their friends are there, I am sorry that is because we have been more successful in the marketplace so more customers are on Safaricom. Why should we be penalised for that? I can’t understand why.

Look at our competitors. Orange have a product called “friends and family” – it’s only Sh1 to call five friends and family which is the cheapest of all. I don’t see people flocking to their network. All five of them can go there, they can take five SIM cards and they can go there and they can stay there. It’s not happening. Why is that?

Is it because of the brand name?

I don’t think there is one answer to that. There is a combination of answers of why people choose Safaricom. And to be very honest, I really don’t understand it. It’s a combination of many things but it is an emotional thing. I went to a presentation by Research International’s Melissa Baker on marketing to the bottom of the pyramid. Even at the bottom of the pyramid when an inferior brand may be cheaper, people choose the superior brand because they want someone who treats them special.

They choose a network provider who offers them a service they feel comfortable with. It’s interesting research and I believe people choose Safaricom because they are comfortable with it. It is a Kenyan company that has probably done some corporate social responsibility in their village.

It’s got Okoa Jahazi, it’s got all these things that they are comfortable with and their friends are comfortable with. So it is an emotional choice rather than a pure financial choice. And it’s an interesting and surprising finding that the customers at the bottom of  the pyramid do not necessarily choose on price alone.

Would it be bad to have a ceiling on the interconnect fee?

Let me put this in perspective on the  interconnect fee. We do not set the interconnect fee, the CCK does. They set the price of Sh4.42. It should be us to set it but the CCK came up some four years ago and said this is what the price is going to be. We don’t set the price, what we set is the retail price to make off-network calls. For  example, Zain has the same off-net call of Sh12 off-net calls that we have. Yu choose to be six shillings. Orange choose to be eight shillings. It’s a choice you make. You can’t sell something and you lose money on it.

The language in the new rules is that you are making supernormal profits.

What is a supernormal profit?

Your profit margin is around 50 per cent. That for any company in the world is very high.

No, it’s in the low forties and I’m sorry, I don’t agree with you. That may be high for “any company in the world” but for a mobile company it is not high. If you look at our peers, that is an acceptable profit margin at Orascom, MTN, Vodafone or Vodacom. All of them are quoted companies that are maybe not the same size as us, or are bigger than us. We are a very capital intensive industry and that profit is before depreciation and all that.

If you go to the EBITDA (earnings before interest, taxes, depreciation and amortization) level then you are down to the 20s per cent. You go down to the net level, it’s in the low 30s. That is the profit you need in order to invest  in a capital intensive industry. So what is supernormal? If we were making 80 per cent or 60 per cent profit then I would agree with you. In any case, I’m a listed company. What is my objective? I have 820,000 Kenyan shareholders who are expecting a dividend from this company. That is why they invested and you  can’t pay any dividend without a profit.

What do you think the impact on the share price might be if these regulations go through?

I don’t know. Right now the share price is going up. That’s because there is a big buyer in the market. But I think this could have an impact on the share price. If you go on our roadshow with the investor public, they are concerned about two or three things. One of them is regulatory. If we don’t turn this around and get some modification on it, it will have an impact on the share price.

You are arguing that what Safaricom is doing is normal, even though it’s got a very large share of the market. If the CCK and the Ministry of Information are aware that there is nothing particularly abnormal, and that Safaricom has been a flagship for Kenya with Mpesa being adopted worldwide, so what is the issue with CCK? There must be some hidden thing that you are not seeing or we are not seeing.

I would not want to speculate in the media about what I think. These regulations have been subject to much discussion amongst ourselves. Up until the time they were published, we were led to believe, and [Charles] Njoroge the DG said I can say this, that the regulations would be modified to include the  definition of abuse of dominance. That is all we are asking for, for that to be included and they all said that it would be put in there. They said “don’t worry Michael” and it hasn’t happened. Why has it not happened? I believe that there are other forces at play that I don’t want to speculate about.

Courtesy: Nairobi Star