Safaricom featured on businessweek…kudos


Visitors to the headquarters of Safaricom in Nairobi must first face the scrutiny of a pair of imposing uniformed guards who peer sternly at vehicle occupants before lowering a hydraulically operated metal roadblock that looks strong enough to stop a speeding truck. The tight security is a reminder that Kenya, though relatively prosperous and stable by African standards, is still a difficult place to run a mobile-phone company.

Safaricom, a 60-40 joint venture of the Kenyan government and London-based Vodafone (VOD), wrecks an average of one maintenance vehicle a month on the country’s abysmal rural roads. Even in urban areas, cellular base stations require diesel-powered generators to compensate for unreliable or nonexistent electrical power. And Safaricom must surround the base stations with electrified fences and alarm systems to discourage theft of fuel, as well as the generators themselves.

Yet despite challenges like those, not to mention a customer base that is still largely poor, Safaricom is a huge success story. It commands 70% market share in Kenya and booked sales growth last year of 36%—a rate its London co-parent can only dream of—plus solid 25% profit margins. From just 17,000 subscribers in 2000, Safaricom now has 7.4 million, exceeding even the most optimistic forecasts. Profit in the fiscal year ended Mar. 31 was $188 million on sales of $741 million. “Nobody understood the pent-up demand,” says Safaricom CEO Michael Joseph, a Vodafone veteran originally from South Africa.

Going Public in Nairobi

Now Safaricom is planning an initial public offering on the Nairobi Stock Exchange, an event that will help call attention to the potential of Africa as a market for mobile phones—and other products. The November IPO of a 25% stake is expected to value the company at $2 billion, and possibly much more.

Safaricom is one of a host of lesser-known mobile-phone companies that are proving there is money to be made in the African mobile market for operators who tailor their offering to local needs. Other leading carriers include South Africa’s MTN (MTNJ.DE), Netherlands-based Celtel (which competes with Safaricom in Kenya), and Luxembourg-based Millicom (MICC), which operates in seven African countries from Chad to Mauritius. “There are many years of growth ahead of us in Africa,” says Marc Beuls, CEO of Millicom. He notes that his company has learned how to manage in places like the Democratic Republic of the Congo, which is still recovering from years of civil war.

Safaricom, which Joseph boasts is the most profitable company in East Africa, is an industry showcase for how to make money in a low-income market. The key is to align services with customers’ limited means. Unlike European or U.S. operators, for example, Safaricom and most other operators in developing markets don’t subsidize the purchase price of handsets. Customers buy their own, either new or for $10 or less in the thriving gray market.

Prepaid Airtime

The system encourages handset makers to offer cheaper handsets, while allowing operators to make money on customers who don’t talk on their phones very much. In addition, almost all customers buy prepaid airtime, meaning Safaricom doesn’t have to worry about billing or creditworthiness. (The shift to such entry-level markets is one reason Nokia [NOK] is doing so much better than Motorola these days.) (See, 07/19/07, “Why Nokia is Leaving Moto in the Dust.”)

The average Safaricom customer spends less than $10 per month on phone calls, a sum that would be considered disastrous in a developed market but doesn’t faze CEO Joseph. “We can make good money on that,” he says.

Even in a low-wage country like Kenya, Safaricom pays close attention to labor costs and is outsourcing some of its IT to India rather than trying to develop expertise in-house. And to help solve the power problem, the company is experimenting with wind generation for remote base stations. (Solar power is not practical because the panels are a tempting target for thieves, and many regions of Kenya endure periods of heavy rain and little sunlight.)

‘Bottom of the Pyramid’

Joseph also is pushing to make service even cheaper for Kenyan customers. Customers can already buy airtime in denominations of as little as 50 Kenyan shillings, or about 77 cents. Joseph says that, despite resistance from his own finance people, he wants to push the minimum even lower, in recognition of the fact that many Kenyans rarely have more than a few dollars in their pockets. In the past, lowering the minimum airtime purchase has boosted usage. “This is classic marketing to the bottom of the pyramid,” he says.

And he’s urging handset makers to offer even cheaper phones. Safaricom is about to launch a $20 handset made by China’s ZTE (ZTCOF.PK). That move is a tacit challenge to Nokia, the market leader in handsets, whose cheapest phone costs about $40. Piotr Labuszewski, Nokia’s Nairobi-based area manager for East Africa, says Kenyan buyers are willing to pay more for reliability and service. But Joseph would like to see phone prices fall even more. “The market is demanding a cheap handset,” he says.

Despite Safaricom’s dominant market share, competition is growing. The only other licensed operator is Celtel, but a third, Zimbabwe-based Econet, has announced plans to enter the market in early 2008. With mobile growth continuing to surprise forecasters, there seems to be plenty of room for everybody. “Every year we seem to be growing faster than the last. You wonder, when is it going to end?” muses Joseph. No time soon, as far as anyone can tell.

Ewing is BusinessWeek‘s European regional editor.

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