Intense competition compels telcos in Ghana to cut phone call charges

Just a few years ago, mobile network operators in Ghana were busy consolidating their profits, enjoying average industry call charge of 13 pesewas per minute on calls within the same network and 14 pesewas on calls to other local networks.

At the time, motivation was very weak for the operators to even consider cutting call charges.

Now, the period of ‘easy’ profit appears to be drawing to a close as operators have started slashing voice call charges down significantly in order to stay in competition.

Last September, two operators, Vodafone and Zain, cut their call charges by as much as 40% - a welcome surprise to Ghanaian subscribers who long understood that increased competition could ultimately make its way to benefiting their pockets.

As recently as the first quarter of 2010, the industry regulator, the National Communication Authority (NCA), reported that call rate charges were increasing, citing a 9% increase in local call charges for the period of January to March, compared to the last quarter of 2009.

So Zain and Vodafone’s drop in prices comes as a shock to everyone. This signals that competition has become so intense that operators are willing to sacrifice their profit margins to poach subscribers from other networks, assuming that subscribers will likely shop for the deals that ease pressure on their phone bills.
However pricing is not all that there is to sustaining subscribers in this highly competitive industry, unique service niches are very important to attaining brand loyalty of subscribers.
In the US for example, although AT&T is one of the more expensive operators, people tend to stick to it because it is the only carrier of the iPhone. Also, Verizon covers more regions of America and therefore has superior service (i.e. your phone does not cut off constantly) and so people stick to them for this reason and not because of price.

The price battle started when Zain (Now a subsidiary of the Indian based Bharti Airtel) and Vodafone Ghana, both the result of the acquisitions of previously state-owned enterprises by international telecom giants, cut their rates to 8 pesewas per minute from approximately 14 pesewas a minute.

A month later in October, MTN, the nations biggest mobile telephony operator in terms of subscriber base followed suit with a bigger cut to 7.5 pesewas per minute. Before MTN announced its cut, Wireless Federation, a London-based wireless industry research conglomerate, had hinted that the market leader was going to conform to developing industry trend of charges reductions.

Given that MTN accounts for over 8 million out of the 16.6 million mobile telephone subscribers in the country as of the end of August 2010, a move by the operator to cut its call rate to 7.5 pesewas from 14 pesewas, was the ultimate news to hit mobile telephony subscribers.

When MTN’s competitors started the charge cuts in September, its Chief Marketing Officer, Clement Asante told journalists at a media briefing, in Accra, that the mobile operator was going to test the pulse of its customers and respond promptly to their demand, stating that: “What the customer wants is what we will do.” MTN Ghana’s Chief Executive Officer, Bret Goschen added at the occasion that: “I am sure there will be some adjustments in some areas”.

Therefore, it came as no surprise when the mobile telephony giant joined in the ‘price war’ started by its competitors.

MTN’s sheer size suggests that most calls originate and terminate on its platforms. However, it remains to be seen how the dominant market operator will fare now that it has fully immersed itself in the price cut battle.

In March 2004 an industry specific paper analyzing elasticity of pricing in relation to telecommunication services, posted to the Institution of Electrical Engineers’ digital library in the UK by Fitkov-Norris of the Kingston University Business School, UK, stated that with the effect of pricing in the industry, an accurate forecasting of future demand for cellular services would be essential because of the high infrastructure costs.

“Nobody wins in a price war”, warns Nigel Hollis of Millward Brown, a brand research firm, during the company’s official launch of its Ghanaian subsidiary in October. Hollis, with his over 29 years in brands research across the world, is privy to the repercussions of price undercutting by brands trying to gain footholds in emerging markets. This is also why some other industry pundits think the current cut in charges are unsustainable and a temporary strategic positioning tool.

By the end of August 2010, the two biggest operators controlled approximately 74% of the market with the remaining three operators sharing less than 30% of the remaining pie. The lopsided nature of the market easily called for a fresh injection of competition. MTN controls 51% of the market with over 8.5 million subscribers, while Tigo accounts for 23%.

Daniel Quarcoo, an Investment Banker in Accra sums up the perception of many subscribers in the face of this competition.

“If networks are cutting prices, we don’t care how much, all we know is that we are making considerable savings on phone bills”, but other subscribers, even though are seeing obvious savings on their phone bills, the ultimate satisfaction will be in their ability to see service providers matching attractive tariff pricing with high quality network services.     

With interconnection fees - charges incurred by operators when completing calls to other networks - pegged at 5 pesewas per minute as agreed interconnection fee, any further
decrease beyond the 7.5 pesewa-mark would lead experts to question whether any profit margin would be left at all.

The current 7.5 to 8 pesewas charge per minute seems to be a reasonable threshold, but from all hints, some operators may be willing to push the boundaries further if the need arises.     

With profit margins of 2 to 3 pesewas per minute, most  networks will be able to keep afloat. And it is not likely that any operator would go below the 7 pesewa mark as such an action will burn out the remaining margins - except of course, if there was a further charge reduction from a dominant player who wants to aggressively reaffirm its position. Apart from interconnection charges, operators have to contend with several
fees, such as the Communication Service Tax (CST) which requires operators to pay 6% of their services income to the government.

Although many believe that the service providers have enjoyed ‘easy’ profits fleecing subscribers and that the latest campaign of charge cuts is long overdue, one industry expert, Robert Palitz, former Managing Director of Kasapa Telecom (now Expresso Telecom), thinks the current price-cuts are not here to stay. According to him, at 5 pesewas of interconnection fees, operators will have to balance their margins with other mandatory fees. “Do you know at 8 pesewas, how much they get to retain from a 1 minute off-net call?” he asks.  “Subtract taxes such as Valued Added Tax (VAT), National Health Insurance Levy (NHIL), and Communication Service Tax (CST) and interconnect regulatory fees, the Ghana Investment Fund for Electronic Communication (GIFEC) and commissions to the distributors of top-ups; operators lose 0.342 pesewas per minute”.

VAT and the NHIL, together, are a mandatory 15% charge. In addition, operators are required to pay 6% of their services income to the government as Communications Service Tax (CST), which is channelled into youth employment programmes. Meanwhile, GIFEC, set up in 2005 to facilitate mobile telephony and internet access to rural and remote communities in Ghana, is imposed on mobile network operators, to which they have to donate 1% of their profits.

These charges notwithstanding, operators have still found room to cut their prices. “But, what is happening today is unprecedented. Consumers never thought this day would ever come.
Subscribers couldn’t imagine ever seeing a day when networks would risk sacrificing their profitability to, either climb up in market position or maintain leadership. But, that day is here. And, these are going to be the most challenging times for the industry, going forward,” Kwasi Amoafo-Yeboah, CEO of Telligent Wireless, wrote in his column in the Monday September 27, 2010 issue of the Economy Times, a Ghanaian weekly business newspaper.

The underlying factor driving this trend appears to be volume, “more volume in new subscribers; more volume in market share; and maybe even more volume in average revenue per user,” Mr. Amoafo-Yeboah said. The licensing of new entrants coupled with recent acquisitions in the industry has given momentum to the need to balance pricing and return on investment. According to Mr. Amoafo-Yeboah, new entrants with abundant idle capacity have decided to offer that excess capacity to consumers at a cost, perhaps, nominally above their cost of operation, in an effort to woo subscribers from incumbent networks.

This strategy which could initially give incumbents the jitters because they are not exactly happy losing subscribers, no matter how few they are, will be proven short-lived if incumbents decide to price-match. If that happens and these promotional prices became entrenched, networks will have to accelerate the development of revenue streams from other areas such as data, SMS, money transfer and other value added services in order to supplement their voice revenues.

“It has always been our strategy to make mobile telephony more affordable for our customers and offer them superior products and services. The average number of minutes a mobile phone customer talks in Africa is remarkably low when we compare it to other countries and it’s not because we don’t like to talk. It simply means that we need to facilitate their need to communicate. By making our network more affordable, we are making it accessible to everyone so that they can talk for as long as they want,” says Antoinette Atuah of the Corporate Communications Department of Zain Ghana. “As a business, it is not in our interest to introduce a price charge that is not sustainable since it will ultimately affect our ability to deliver our superior products and services to our customers. Our new charge has been received very well by our customers and we have seen an increase in the number of subscribers since the announcement,” she continues.

Ghana’s telecom industry is gradually increasing in sophistication as teledensity figures prove. In 1996, teledensity was a mere 0.26% which invariably meant there were only 26 telephone lines to 1,000 people. Latest statistics from the NCA shows that teledensity now stands at about 70%, meaning 700 telephone lines per 1,000 people. In the first six months of 2010, the number of mobile subscribers increased by 7.3% to reach 16.9 million out of the estimated 23 million people in Ghana. Of this figure, fixed telephone lines constitute a meager 1.3%.

Isaac Abrahams of the Corporate Affairs Department of Vodafone Ghana thinks that by making telecommunication services affordable, more people who hitherto could not afford to maintain a mobile phone will now have access to telecommunication services, thus bridging the digital divide and expanding the revenue base in general. The rate of penetration is expected to keep rising until it reaches a saturation point where all potential subscribers are linked to a network. At that point, the market will be one where existing subscribers are recycled among the various players. Customer loyalty will be paramount then.

At this point though, competition is starting to compel the telecoms companies to cut inefficiencies in order to offer quality services to subscribers. Competition may reduce profit margins but will always force industry players to cut only as much as will allow for normal profit. So the fact that the players are engaged in a price war shows that there is either excess margin they can afford to cut or there are inefficiencies they know they can eliminate in order to reduce cost and remain competitive. It is difficult to tell how shareholders feel about the cuts in mobile telephony charges since none of the operators are listed on the Ghana Stock Exchange.

As a first step to addressing inefficiencies, operators may begin investing in more network switches to reduce the effect on increased traffic on their existing infrastructure, as a result of the lower prices. Networks have already begun experiencing increased congestion. As the NCA Monitoring Report indicates, call congestion rates worsened in the first quarter of this year, increasing from an industry average of 0.20% during the last quarter of 2009 to 0.38% by March 2010.

“New entrants into the industry and smaller networks, wooed to invest by the prospects of rapid gains, have quickly realized that those gains will come, but very slowly. The next growth source is not expected to be as profitable as the first, as telcos mine for new subscribers from the remaining population with the least disposable incomes,” says Mr. Amoafo-Yeboah.

There are still about 7 million potential subscribers for the taking, however, experts believe the telecom market has reached a point of near saturation in terms of high revenue/high value subscribers as the remaining potential subscribers include the elderly and children barely in their teens.

“But, going forward, the war is not going to be won by deep discounting and chasing after a large subscriber base. Smart operators are shifting from market share acquisition to focusing on customer satisfaction,” reasons Mr. Amoafo-Yeboah. “A protracted price war will ultimately have a negative effect on the consumer. Healthy competition with peaceful co-existence and reasonable profit levels will allow operators to earn decent returns on their investment while they continue to expend the necessary capital expenditure to ensure higher quality and expansion of service”, Mr Amoafo Yeboah says.

Actually, the intense competition is not peculiar to Ghana. On the world stage, smart operators have deployed tried and tested strategies to remain in business. They targeted various market segments and consequently satisfied the needs of select population groups, which have paid off substantially.

For instance, AT&T in the US is abandoning its back-and-forth map and app wars with Verizon and communicating the bigger ideas behind the brand. “ They’re getting away from that petty competition and trying to remind people of other factors in the value equation. AT&T is also smart to consolidate its efforts and promote one brand/one message to all stakeholders,” says Denise Lee Yohn, an established speaker and author, on her blog: Brands as Business Bites.

But although telecom operators do not want to admit it, premarket saturation and investments in the quality of service will be a secondary consideration to price.

Most “innovations” to date advertised by operators are often recycled ideas with fresh coatings. Nonetheless, it appears this approach is right for the time being. What subscribers actually seem to care about is not the overlap of products and services but rather guarding their power to choose a network which offers them the most affordable service.