Kenya: South African Firms Invade Internet Market

(HornTrade) – Will MTN finally set up as a mobile service operator in Kenya after several years of failed attempts?

That’s the million-dollar question after the data unit of South Africa’s biggest mobile operator took control of a local internet service provider, UUNET, by buying a majority stake. The firm has since rebranded to MTN Business Kenya, to reflect its principal shareholders.

The MTN management said the mobile business was not in its initial plan, but did not rule out the possibility. “I’m not aware of such plans,” said Ms Angela Gahagan, the managing executive of MTN Business Africa, when they official unveiled the company’s brand in Nairobi. “However, the group is always looking for opportunities for growth.”

MTN group is Africa’s largest telecommunications operator with more than 130 million cellular subscribers in the region and in the Middle East. MTN and Telkom South Africa have for long been trying to enter the Kenyan telecoms market, but the mobile phone segment has proved a hard nut to crack. In 2007, the two giants were among those that bid for a 51 per cent stake in Telkom Kenya, but lost to France Telecom, which now runs the Orange mobile brand in Kenya.

At one point, MTN was rumoured to have bid to buy Zain Africa operations. Yet again, it was beaten to it by India’s Bharti Airtel, which gave a sweeter offer. Before buying Zain Africa operations (in 15 countries) Bharti Airtel was in talks for a possible merger deal with MTN, but this did not go through.

Although MTN and Telkom South Africa have for long been thirsting for the fast-growing telecoms market in Kenya and the region, market watchers say it will be a tall order for them to enter the mobile phone market at this stage, with the prevailing stiff competition. Their big bet remains in the data, as MTN has done, which is ripe but unexploited.

Mr Peter Wanyonyi, a telecoms consultant, says Kenya’s telecoms voice market has largely plateaued in terms of revenues. “If anything, we expect to see mobile providers’ bottom lines begin to take a hit as competition from within forces them to not only cut costs (many are going for managed services), but also engage in expensive survival-of-the-cheapest price wars,” Mr Wanyonyi says.

MTN Business Kenya managing director, Tom Omariba, said: “We are leveraging on MTN’s continental footprint to up our game in the internet market.”

Aly Khan Satchu, financial markets analyst and NSE data vendor, says the likes of MTN may not want to challenge the two heavy weights, Safaricom and Bharti Airtel, head on in what has now become a commoditised voice business but see UUNET and internet service providers (ISPs) as a low cost entry ticket into the data game.

Francis Hook, the regional manager of IDC East Africa, says MTN’s end-game in Kenya is the enterprise data and connectivity market. MTN has an advantage over local players. According to Mr Hook, while Safaricom and Telkom Kenya are big locally, they have limitations in terms of servicing big multinational companies that need a continent-wide provider in some cases.

In this, he says, MTN through its MTN Business and other subsidiaries, have the upper hand. Another example is Vodacom (Vodafone) through Gateway Communications, which has a presence in more than 40 countries on the continent and can address the needs of multinationals.

Safaricom is a subsidiary of Vodafone and is part of the Vodafone presence in Africa, but this does not make it a continent-wide player, rather part of a continent wide player.

Safaricom’s new chief executive, Bob Collymore, says MTN’s entry into the local market will be felt strongly because of its Africa-wide experience. “But we welcome stiff competition,” he said. “There’s enough space for everyone, so long as they pick their own cake.”

Telkom, because of France Telecom/Orange is also part of a continent-wide operation (Orange is in 16 countries in Africa, has invested in TEAMS, Eassy and ACE, a West African cable system).

“Telkom Kenya and Safaricom are parts of a bigger group, but in terms of waging a war locally they could hold their own; but when it comes to multinationals, and where they have their headquarters in South Africa, UK or elsewhere, sealing deals could prove to be a challenge,” Mr Hook says.

“MTN’s presence in Kenya, indirectly counters Vodafone’s (since Safaricom is here as a subsidiary).”

According to Mr Omariba, the new structure will give the firm impetus to play within the data sphere and would carry internet traffic from pan-African networks to the rest of the world by leveraging on MTN Business.

Mr Wanyonyi says it will be interesting if MTN decides to expand by purchasing an existing mobile service provider – maybe Yu, which seems to be lost for a strategy and niche’ market. “If MTN can then roll out a data-network that goes aggressively after the corporate market (via MTN UUNET’s base) and the individual-user market (via Yu or someone similar), it (Safaricom) could take some beating as data revenues climb,” he adds.

In 2004, Verizon South Africa bought UUNET Africa including the Kenyan subsidiary. However, in 2008, South Africa-based mobile operator, MTN, bought 100 per cent of the corporate internet service provider Verizon South Africa, which was owned by US-based Verizon Communications (70 per cent) and local group Jay & Jayendra (30 per cent).

Later, MTN (60 per cent) and Telkom South Africa (40 per cent) in a joint venture, formed SDN Mauritius which took over 70 per cent of UUNET Kenya. The other 30 per cent is taken by local shareholding to satisfy the Communications Commission of Kenya requirement on ownership.

For MTN Business Kenya, it is a dream come true, through leveraging on the extensive footprint offered by its two main shareholders, MTN business and Telkom SA.

MTN has a majority stake in the EASSy sub-sea cable, affording the Kenyan outfit the first opportunity to access the cable when it lands.

Ms Gahagan said MTN Business is currently building an African cloud enabling MTN Business Kenya to introduce business services such as server virtualisation and virtual storage in the region. This will keep the turnaround time of these services in the regional market within international best practice.

MTN Business is present in 21 countries, 19 of them in Africa and serves Iran and Afghanistan. Even with the name change, the ISP remains adamant that it will focus on its corporate customers. “You cannot be everything to all customers. We have to look at our strengths and choose which area we can serve. If you try to serve both markets, you will suffer,” Mr Omariba said.

MTN Business’ strategy is expected to give the firm a cash injection as well as technical expertise to forge a strong campaign into the data business in Kenya and grow its current 700-corporate customers.

The formal entry of MTN into the country will also hit local firms like Access Kenya, who gained a number of corporate clients following the decline of UUNET’s fortunes in 2007.

In an earlier interview with Afsat Services Ltd’s managing director, Mr Dawood Shah, Afsat Communications Ltd and Africa Online, whose main shareholders are South African telcos, were to merge.

In complex share-purchase transactions, Telkom SA ended up acquiring the local satellite data transmission services company, Afsat Communications Ltd and Internet Service Provider Africa Online.

In 2007, MWEB Africa, the Internet solutions arm of Naspers, the company that owns Multichoice Africa and popular magazine arm, Media 24, acquired satellite ISP, Afsat Communications Ltd, which operates under the brand name iWay Africa.

Afsat is Africa’s biggest satellite based ISP and is active in over 30 countries in East, West and Southern Africa. It has operating subsidiaries in Kenya, Nigeria, Tanzania and Uganda. Later, Telkom South Africa acquired 100 per cent and 75 per cent shareholding in MWEB and MWEB Namibia respectively.

And since MWEB had acquired Afsat Communications, including its subsidiaries in Kenya, Uganda, Tanzania, Nigeria and Zambia in October 2007, the move put Afsat in the hands of the South African telecom giant.

Similarly in 2007, Telkom SA bought Africa Online, one of the biggest internet service providers on the continent. A provider of internet services on the African continent and a subsidiary of the African Lakes Corporation Limited, Africa Online’s geographic coverage extends to Kenya, Tanzania, Uganda, Ghana, Cote d Ivoire, Namibia, Swaziland and Zimbabwe.

Early this year, South African tech firm Allied Technologies Ltd, increased its stake in KDN through the purchase of a 9 per cent stake in addition to the 51 per cent it has held since 2008.

Other tech firms that have recently entered Kenya include ASYST Intelligence, BlueKey, both management software providers, and Dimension Data (acquired IS Solutions) and EMC Corporation.

Analysts say the South African firm’s launch in East Africa is a strategy aimed at reducing dependence on domestic revenues, while expanding further into Africa to offset dwindling profits at home.


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