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A to Z Chat with Michael Joseph

Ten days before he retires as CEO of Safaricom, Michael Joseph gave a talk at the Nairobi iHub on his ten years at the helm of the company, on the day to day job, and the up’s & down’s of the job in taking the company from a literal zero to hero.

recap

Beginning: Safaricom started with (inherited) 17,000 customers, 9 cell sites in Nairobi no billing system, switch in Extelecom House, 5 Vodafone employees and 55 Safaricom staff deployed from Telkom (not chosen) – all working in a 3 bedroom flat at Norfolk Towers. Has little cash (started with $20 million from Vodafone, and paid $10 million for a switch leaving the balance for salaries & rents) and launched on 23 October 200 (Saturday) and on Monday morning network collapsed (blamed on IT person)

Crazy Kenyans; this was a theme in his talk of marketing in Kenya
Family & friends the average Kenyan calls 2.3 people, a fact he pointed out to his France Telecom (Orange) counterpart when they launched a family & friends promotion in which orange customers could call 5 people for 1 shilling per minute. The (forever) promo has since been discontinued
Free credit – a promotion to give away all the subscribers Kshs 200 free credit was a major mistake and after it was bungled by an IT person in Dubai, led to 5 days of congestion. Lesson learnt – don’t surprise customers
– when okoa jahazi was launched, 1.7 million applied, even those who had credit and didn’t need it (crazy Kenyans love new things)

Fibre: Media don’t understand it, people expect after companies invested millions of dollars in undersea cables, internet prices would drop by 90% the next day. They still have to have a redundant network, and a network is pensive to maintain. They have 4 cables to Mombasa, and every day (Chinese) road contractors are cutting fibre without any punishment. Since 3 cables land at the same point in Mombasa, they will land points in Kilifi and Dar es Salaam for redundancy
– He regrets not investing in metro fiber 4 years ago, which they are now leasing.

Growth
Expectations: Safaricom expected to have 400,000 customers in 5 years, with about 50% of the market (against Kencell’s 50%). Had their first million customers in 2003, second in 2004, and by growing ½ million customers a month, is now a billion dollar company.

The company growing at 20 – 25% a year; he used to report to 2 owners, now has over 700,000 (including his secretary ) who bought shares expecting the price to triple to 20 shillings. Safaricom has to balance their needs and revenue, and are still investing (they have the only 3G network in Kenya despite what their competitors say) while competing with Zain/Airtel’s subsidized/risky price cuts, and Essar who have petroleum and steel.

Competition: the battle with Zain/Airtel is being won: their subscriber numbers have not dropped – and while revenue has dropped, minutes (usage) has gone up as has traffic into the network and they will watch their costs

Finances: With the first $20m spent, they had to borrow money. They were to get a Belgium export credit loan if they bought equipment from Siemens, but since shareholders would not sign guarantees, Safaricom had to pledge their network (which at the time was not strong enough to manage their subscriber base, but when he signed equipment was shipped and this took away their congestion problems (at that time)

Green initiatives: They are greener now than before, have 60 sites running on wind power (backed by generator). Main concern is not their data equipment, but for air conditioning to cool batteries, so are always looking at new ways to cool the batteries – e.g. bury batteries in the ground, and new (but pricey) batteries from Canada that don’t have to be cooled. Their HQ has smart systems, so lights go off when no one is in the room. They can do more, but local wind generator cost $80,000, and the ones from India that cost $20,000 are easily toppled by Kenya’s wind gusts. They are looking at solar sites, but again need air conditioning for batteries

Investment decisions: They would start in Nairobi and Mombasa then looked at expanding the market. They measure ROI every six months, expect payback form a base station in 1 year – and 80% payback in 6 months. While they outsource physical maintenance – towers, lights, fencing, fuel, power remains a big cost – they have 5,000 generators to run when electricity (KPLC) cuts off

Outsourcing strategy: he is not a fan of this as outsourcing partners don’t reinvest until they have to. He said Bharti Airtel EBITDA in India is down from 45% to 35% this year because they outsourced a lot of key costs, which are now coming back. Safaricom may outsource network management, but not outsource customer care because quality will drop.

Innovation
– They have a team of 40 people who spend time looking around the world for new ideas, and with the Vodafone group e.g. sambaza was already in Sudan & Egypt – and have had great successes like Sambaza, Okoa Jahazi, M-Pesa and M-Kesho

– Innovation without disruption says the company is very innovative in the mobile space and they innovate to make money, not for innovation space, as his goal is to deliver to shareholders. He takes pride that the company has won international awards, in Silicon Valley, not the UN

– Local developers when vendors want to sell new ideas, Kenyans write to them with their new great ideas, -but everyone, has to sign their legal waiver to protect the company from being sued.
– On revenue share, his belief is that Safaricom should get the lion’s share – developers will be using their airtime, customers, marketing, distributors and collection method so it should be 80:20; if you want to keep 80%, go to Zain. But sometimes people can get good splits with Safaricom e.g. he did not believe ring back tones would make money, so mistakenly signed a deal that gave most of the money to developers
– Safaricom has not stolen anybody ideas – they have been sued a few times and won every time because they document everything. Also, many ideas belong to nobody, and while someone claims they invented m-kesho is his (MJ) personal idea – and Safaricom have enjoined themselves alongside Equity Bank, who are being sued by an inventor

Key decisions
Pre-paid billing: could not afford a post-paid billing system, so they opted to go for pre-paid customers and bought a (cheaper) prepaid system that cost $200,000 – in hindsight was a key decision.
Per second billing: he made the decision to bill per second even though per minute billing generated 20 – 25% more per call. He did not have scientific proof but had seen it in South America and felt his market was the mwananchi (ordinary person) who would use airtime in small increments-
Customer service: was free & 24/7 – which was a good decision because people don’t read phone instructions booklets. it was not very expensive and they hired 200 university graduates. People then were even calling from Kencell and today people still call to ask how to send SMS
Guiding principle – do it because it makes financial sense. Safaricom needs to be seen as a Kenyan company, with all their spend is in Kenya, unlike their competitors who are purely foreign owned. If Safaricom, has to outsource, he insists that the company have to have an office in Nairobi or he won’t buy from them. He mentioned Karanja Macharia of mobile planet has done very well by being a local partner and who won over foreign SMS firms.

Leadership
– Best advice was from a boss in Scotland – a leader has to make decisions, don’t be afraid to make them, (e.g. asking people to leave the company) and if you’re right 7 out of 10 are right, you are doing well. He considers himself a benevolent dictator, who while he consults internally, makes the decision, he sees external consultants having no responsibility for their advice. He admits he has made wrong decisions (as an engineer in charge of marketing for the company)

When a competitor changes your business plans: don’t panic, and reassure your people; they had studied airtel in Sri Lanka and saw how they came in with low prices and ‘destroyed’ the industry to a level that the government had to intervene. They have had a measured response – they could have dropped prices further, but their promotions are working.

Lessons learnt: (i) you won’t learn anything from a book (ii) have absolute integrity (iii) lead from the front – being a leader is not about being seeing at team building exercises or having your name on the door (iv) research – if you don’t know what you’re doing, act like you know

M-Pesa
– Vodafone won £1 million DFID (UK) award for deepening financial penetration for the unbanked, which they also had to match financially – and they were to develop a system for the disbursement and repayment of micro finance loans. They tested in Thika for 6 months and realized that it had more potential as a money transfer tool, and they launched M-pesa in March 2007.
– M-pesa success has not come from technology, but from the distribution network –(20,000) points around the country

Role of government
– GoK should play an enabling not punitive role as a regulator. But what is enabling about getting a license? Vodafone paid $55m for a license to operate in Kenya and another $25m for 3G. Their competitors have failed to beat Safaricom and run to the government to complain about Safaricom’s dominance. Safaricom opposed the CCK regulatory rules as unfair – and he wondered why EABL, Bidco and Kenya Airways (all with 80-90% e) were not subject to such rules – and why the government was sending the wrong signal to investors by seeming to crack down on Safaricom
Right regulator ICT is going to create jobs, and has a good PS now, but GoK has to pick the right people to run the industry, not people who happen to be married to a relative of the president or come from his town (he said he told this to Kibaki and got a good laugh)
Kenya as a BPO centre Kenya should be careful about investing heavily in this as a pillar of vision 2030 as this as it is l very fickle, and there is no loyalty you’re the flavour today, but what happens tomorrow? Can’t rely on time zone and English speaking skills, as companies will still take away their business to the next country to offer an incentive or when things go wrong. E.g. Delta air moved their outsourced customer service from India back to the US, when customers complained they could not understand the CS agents

Safaricom vs. Banks
– M-pesa is unregulated; when they got into it, there was no law covering that, but they sought and got ‘blessing’ from the mobile and banking regulators.
– Big (foreign) multinational banks who had shut down rural branches abandoning their customer opposed m-pesa and fought in government & parliament and would have succeeded till he persuaded acting finance minister John Michuki to green light m-pesa.
– M-kesho allows people to save in small increments, and get interest immediately is a revolutionary product (he came up with), and in 3 months new 700,000 savings accounts, (which was more than all the saving accounts that existed in the country – and money that was not there has moved from the informal to the formal banking sector). On M-kesho had to partner with a bank (did not want to hold people deposit/too much regulation) and signed on with Equity Bank who have nationwide reach to make it work and took the risk. This exclusive deal which ends in May 2011
Warning to banks he has told the banking community that retail banking will disappear in 10 years time. Customers will not go there (to brick & mortar branches) except for loans, as ordinary banking will be on the mobile phone whose convenience is unprecedented. E.g. The biggest transaction days for M-pesa are when schools reopen (previously people would be queuing in banking halls for expensive money orders)

Social Media: – He is not a fan of social media because people can take advantage of anonymity to write lies about him. He is not on facebook or twitter, but his successor is, and the company uses these tools a lot for marketing
– SMS is a very dangerous phenomenon – and during Kenya election violence, they found many of the hate messages did not originate in Kenya, (came from South Africa). Safaricom responded by ending out peace SMS to subscribers, which was also controversial

Safaricom 2010 AGM

Safaricom held their second AGM since their 2008 share listing at the Bomas of Kenya on September 2 2010.

Angry Shareholders: really complained into management, mostly about the low dividend, and lack of freebies – and the ~1,000 shareholders largely went home unsatisfied (the bus stage was quite full)
Low dividend: Different shareholders complained 20 cents ($0.0025) dividend per share was too low, was not recognized as currency in Kenya, was not comparable to the company’s 19 billion ($238 million) profit, was not worth picking if it fell to the ground etc. The Board Chairman replied that this was a result of the large number of shares and, it was 100% increase of the previous year, and they were looking into share consolidation as a way of making it more meaningful
No SWAG: Shareholders complained about not being given transport to the venue, why there were shirts only for Safaricom staff (they [shareholders] are better ambassadors of the brand), why they only got bottles of water & juice on a cold morning, and why they could not treat shareholders better, when companies like Kengen, many shareholders (~¼ of Safaricom) could? One shareholder who looked like he had been to a ‘local’ before he spoke, said he regretted buying the shares, admonished the company for taking from the poor (subscribers) to give to the rich (board), hurled a few other insults in his speech and walked out to some applause.

No SWAG also includes annual reports, which were handed out at the door, but which shareholders felt should have been mailed to them. The Chairman said that this was a logistical impossible, it would cost almost 250 million ($3 million) to mail 800,000 books and last year shareholders had themselves approved that reports be placed on their website or headquarters, with summarized versions printed in the newspapers. How unwieldy is the large shareholder base? The registrars’ computer list at the entrance was over a month old and they did not have records of anyone who bought shares in the last few weeks.

Is CSR bad for shareholders?: Later on when not satisfied with the Chairman’s response on the dividend, they began tackling expense items in the books to see if they could dig out some cuts to yield more profit. Ccorporate social responsibility items came under fire; this argument was first seen at Stanchart a few years ago when shareholders felt ‘their dividend’ was being diverted to unauthorized expensive projects (said shareholder and former MP Jimmy Angwenyi), and which were costly (But Chairman replied that the total amount was Kshs 250 million, broken into small impactful sponsorships like boreholes and schools that had no overall impact on the 8 billion dividend [$100 million]) . Again they went further and began tackling huge payment items (anything larger than the dividend) and suggesting to the Board ways to cut down these costs.

Competition from Zain Airtel: Shareholders also took a stab at management for the high costs of their services, in relation to Zain who had recently cut call and SMS costs to 3 shillings and 1 shilling respectively arguing that the company management is asleep and they will wake up when they find their customers have fled unless they too cut prices. Outgoing CEO Michael Joseph took on these and said they had studied Airtel in India and were ready for the price cuts, but were surprised by the underhand tactics/accusations that followed. Safaricom will find a balance to protect their customer numbers, market share revenue, but most important were their profit margins. He added these prices were unsustainable, but that Safaricom would still make more money at 3 shillings than anyone else

Share price: Later in comments about the share price which has declined in the last month, CEO said the market over-reacted to Zain/Airtel promo they are due to foreign sellers who don’t understand Kenya. They take parts in road shows to teach such investors about the market, how they EBIT margin of 42% is exceptional compared to others like MTN and Orascom, and 4 of the 5 analysts who cover Safaricom put the share price as Kshs 5.5 to 5.8 (who’s the dissenter?).

Farewell Michael Joseph: Late the Chairman called on shareholders to thank retiring CEO Michael Joseph who built the company up from nothing in 10 years to be leading revenue earner and top brand in Kenya.

Waving the patriotic flag: After the meeting ended, CEO gave a talk on his pride in the company, which is a Kenyan company one can be proud of with its customers, M-Pesa (which people all over the world come to study), M-Kesho savings accounts (500,000 users signed up in 2 months). It is 60% owned by Kenyans, which none of their competitors (i.e. Zain, Orange, Essar can claim), all their spend is in Kenya, all their profits are re-invested in Kenya, with nothing outsourced outside. It has 2600 employees (all in Kenya) , and supports over 250,000 other Kenyans through dealership and mpesa agents and another 1,500 in customer care (which they can move that to India but that would not be in spirit of the company)

Reading the Safaricom Tea Leaves

Post two of three: Safaricom has been one of the most progressive companies in terms of investor relation’s management, largely because of the cost of their large shareholder base. They spearheaded move to avail electronic instead of printed annual reports and payment of dividend by m-pesa, as opposed to cheques which were unviable for many shareholder who had the bare minimum of shares. Another benefit of electronic reports is that they are easier for potential investors to obtain (some companies print as few reports as legally possible and they don’t circulate widely)

Inside Safaricom’s 2010 A/R

Shareholders: – Safaricom has 787,363 shareholders down from 828,912 in 2009
– The Government of Kenya has acquired more shares in the company despite a stated move of divestment. This year they have 22 million more shares, going up from 35% to a 35.06% stake
– Overall there are more foreign buyers of Safaricom shares, but NSSF Rwanda may have exited
– Director Esther Koimett bought 517,600 shares, and chairman Nicholas Nganga has 850,100. Outgoing CEO Michael Joseph and Finance Manager Les Baille each own 2.5 million shares, while their replacements, Bob Collymore and Chris Tiffin have none
– Last years’ AGM (the first since NSE listing and prominently advertised as having no handouts or frills) was attended by just 2,182 shareholders.
– 180,000 shareholders got their 2009 dividend by m-pesa (mobile phone payment)

Performance – Revenue breakdown of the 83 billion ($1 billion) in revenue voice accounted for 75% (2009: 83.4%), with SMS and other data at 9.7% (2009: 8.8%), Mpesa at 9.0% (2009: 4.2%) and equipment sales at 4.4% (2009: 3.3%). Revenue growth was 8% for voice, 32% for SMS/Data and 158% for Mpesa n all categories was positive with voice at 7.8%, SMS and other data at 32.4%, 58% for equipment sales and 158% for Mpesa
– North Eastern Kenya region is growing by over 200% owing to improved security

Other Numbers – Earned Kshs 7.6 billion ($95 million) from m-pesa (up from 2.9 billion in 2009)
– Has Kshs 10 billion ($125 million) in cash and short-term deposits, up from 4 billion the year before. Safaricom earned interest income of Kshs 350 million in the year
– Borrowings comprise 6.28 billion from a consortium of banks, 2.3 billion from one bank, and 7.5 billion in corporate bonds
– Have 2,000 dealers and 200,000 retailers
– Pay income tax at 27%, compared to 30% before they listed at the NSE

Staff – Launch ESOP in 2009 with 101 million shares and which will be issued in 2013. 2165 staff (88% of total) have joined the scheme
– Key management were paid 522 million (up from 438m)
– Of their 2,470 staff the company has an almost equal ratio of male and female employees

Fibre/Data Investments: – are investing 890 million into Seacom: they paid 316 million and balance of 573 million is to be paid over the next 5 years
– Paid 2 million to TEAMS for a 22.5% stake (other shareholders are GoK and Telkom both with 20%)
– Paid KPLC Kshs 116 million as part of 290 million for use their power network for fibre distribution over the next 20 years
– Bought packet stream data networks, for wimax,for Kshs 373 million shillings, and has lent Kshs 600 million to One communication (in which they own 51%)

Customers – their internal customer delight index had a measure of 7.38 last year against a target of 7.76
– Its true that premium customers get better customer service – there is a platinum line at call centre to service platinum (high end) customers on a prioritized basis (i.e. even by calling regular customer service free help line, ‘100’ they get through and served faster
– Safaricom business has over 2,000 customers including airlines, media houses, banks
– Mobile data is responsible for 90% of data revenue
customer growth (their measure) Safaricom took up 65% of new phone lines in last year
website: Safaricom the most progressive companies in online investor relations in terms of results and investor briefing posted on the web site and now dividend payments by mobile phone. It now uses twitter & facebook accounts, to promote its services and also try and (slowly) responsd to numerous customer service and product queries posted online

Rival disclosures: Safaricom’s main rival is Zain Kenya – and while it is not a listed company, the former Zain parent was listed on the Kuwait Exchange, and used to produce some extensive reports on their African operations – ranking individual countries by revenue, profit, subscribers – which was information that the local Zain office did not typically share. Similar information can also be gleaned from Orange of France about their Telkom Kenya operation.

Zain Africa sold to Bharti Airtel of India and while a financial quarter is yet to pass since the takeover, it appears they may follow the trend, as they are also a listed company with segmented reporting requirements. For Kenya in July 2010, they note that:

– Airtel Kenya has been given additional frequencies that enable it to offer 3G services
– All operators will have the right to borrow funds from the universal service fund (a fund that will comprise 1% of mobile operators annual turnover) and to use to set up infrastructure in the identified rural areas.
– Kenya companies are Bharti Airtel Kenya B.V. (name changed from Celtel Kenya BV), and Bharti Airtel Kenya Holdings B.V. (name changed from Celtel Kenya Holdings BV)

Bharti Airtel in Kenya

Zain/Bharti shake market: On August 18, Zain Kenya announced new unprecedented low rates for voice calls and SMS in a new tariff war. The new rates for calls of Kshs 3/=(~$0.04) per minute and for SMS of Kshs 1/=(~$0.01), which apply across all networks and are available to all Zain customers, easily trumps their main competitor, and market leader, Safaricom whose rates hover around Kshs 8 for a phone call and Kshs 3.50 for an SMS (and 12/= and 5/= to other networks for the same).

True cheap rates: The new rates have been well received with very popular comments online and a rush by consumers to obtain Zain lines or re-activate old ones. CEO Rene Meza called this a new long dark journey to market dominance [i.e. from 10% now] and one they will tackle aggressively for the long term. But is it sustainable? The last time Zain engaged in a price war, they ended in a bloody loss, with Zain gaining customers but not market share and $90 million in the red.

Airtel Strategy : However Zain Kenya is no more. The push comes from new owners Bharti Airtel of India who completed their takeover of the Zain Africa Group last month and will rebrand the company (in Kenya) by October 2010. They have also set out to re-position the local telecommunications sector in tandem with Essar and France Telecom by lobbying the government for other changes to level the playing field in a market they believe is unfairly dominated by Safaricom and which denies Kenyans true freedom of choice.

At the official launch in July, Airtel executives the emphasized some of their strategies including:
– They are rural focused and will build a rural brand through farming related promotions and CSR activities
– Be a low cost operators; employ low skilled sales force
– Lobby for number portability
– Push for lower interconnection rates which will lead to affordable products
– Lobby for infrastructure sharing i.e. no need to have 5 cell phone towers in a small town (all incurring electricity, security, cement, other charges) town when 1 will do with all Telco’s sharing transmission and fibre
– Work with ecosystem partners, like HP and Eriksson, and have a BPO call centre

Will the government deliver on low connection fees, number portability and infrastructure sharing? At the launch Meza mentioned that the Communications Commission of Kenya (CCK) had lowered the interconnection tariff from about 4 to 2 shillings effective September 2010.

Short-term losses: Meza said they plan to grow revenue and subscribers, and margins and profits will come later from operating a lower cost structure. And in a back stab at the previous owners (and perhaps minority shareholders), he said for the first time in eight years they have shareholders with the right mind-set to allow them to take opportunities in the market, increase rural penetration and utilise the right technology – by investing Kshs 24 billion (~$296 million) in the next 18 months on rural cell phone sites, revamping their zap money transfer systems, increasing their outlets & distribution network, expanding their 2G network, and rolling out a 3G network by the end of the year (since the license fee was reduced this year, they will be able to cover more parts of Kenya than just Nairobi and Mombasa)

Improve on Marketing: Marketing has always been a weak point at Zain, who keep throwing out too many confusing promotions one after another after another. The Wednesday Nation had a full-page ad for the new Zain (3/= and 1/=) rates and on the adjacent page was a small story touting a tariff for Zain ‘Club 20’ subscribers who could now get free calls and unlimited SMS from 11pm to 6 a.m. within the Zain network only! And all this comes a month after they had launched anotherrevolutionarypromotion. Hopefully this will hopefully change with the recent marketing executive appointments and re-focused brand and strategy.

EDIT – Other Developments
– Zain accuses Safaricom of sabotaging its new price offer
– Safaricom reassures Zain over inter-connect capacity, and says their concerns are premature.
– CEO’s e-mail exchange between Rene Meza (Zain) and Michael Joseph (Safaricom)
– Safaricom launches Masaa tariff with prices of Kshs 2-4 for Safaricom calls and Kshs 3-5 to other networks.
– Orange (France Telecom/Telkom Kenya) make their low cost pitch with Kshs 2 and Kshs 4 for on and off net calls respectively, with free on net calls from 10 AM to 5 PM for Kshs 100 per month ($1.25)