Craving wireless Developing countries demand mobile phones

Sunday, July 21, 2002

NAIROBI, Kenya -- An excited Edwin Ireri smiled broadly as he handled his first mobile phone. For the first time in his life, the Kenya Railways inspector could now communicate with his bosses, employees and family at will.

Ireri knows the cell phone will change his life but doesn't quite grasp how people like him are changing the nature of the telecommunications industry.

While wireless companies in Western countries report saturated markets and low profits, demand continues to grow vigorously in Kenya and other developing countries.

In less than two years, more than 770,000 people have signed up for mobile phone service in Kenya, confounding expectations in a nation where most of the 30 million inhabitants earn less than a dollar a day.

Wireless providers Safaricom and KenCell have scrambled to keep up with demand and fiercely compete for market share.

Michael Joseph, managing director of the semiprivate Safaricom, says he expects Kenya to have more than a million subscribers by year's end -- more than double forecasts in a region not known as thirsting for high technology.

"We've done extremely well, in some ways a little too well, because we've struggled to keep up with the demand," Joseph said. The company, a 60-40 partnership between the government-owned Telkom Kenya and Vodaphone, had 420,000 customers by March 2002, 18 months after launching, he said.

KenCell, Safaricom's Vivendi-backed competitor, had similarly modest expectations when it kicked off in August 2000. Phillippe Vandebrouck, managing director and CEO, said the company has more than seven times the 49,000 subscribers it had expected to be serving by the end of 2001.

Informal economy

One reason business is better than expected, even during Kenya's worst economic downturn since independence in 1963, is the strength of the informal economy, which doesn't show up when economists crunch numbers.

"I think people underestimate the informal economy," said Joseph. "You look at any country in Africa and there is a lot of informal economy, a gray market."

Mobile phones are especially attractive to business people who lack offices and fixed-line phones at home -- the people who sell secondhand clothes, drive taxis or sell goods on the sidewalk.

There are just 320,000 fixed telephone lines in Kenya, and a large percentage of those don't work because the government monopoly has not invested in new equipment.

Ireri said he used to have a fixed line phone at home but eventually had it disconnected. Vandals often stole the copper phone lines, leaving him without service for months at a time, he said, or other people would tap his line and make calls, running up his bill.

With a subsidy from his employer, which is common, Ireri said he expects his productivity to go up dramatically while being able to stay in touch with his family when he travels.

Both KenCell and Safaricom have approached the Kenyan market differently than they would a developed country.

Most Kenyan subscribers pay by buying small-denomination calling cards, not by getting a bill at the end of the month. Both companies also subsidize the cost of the handset, offering basic Sagem phones for as little as $53.

The key to success is scale.

Outnumber fixed lines

Mobile phones also outnumber fixed lines in several European countries as well as Cambodia, Paraguay, Uganda, Venezuela, Ivory Coast, South Korea, Rwanda, Morocco, Tanzania, Chile, Mexico and the Philippines, said Paul Melton, a researcher for the Washington, D.C.-based telecom research firm TeleGeography.

The International Telegraphy Union predicts that cell phones will exceed fixed lines worldwide this year. While in western Europe growth rates are slowing, with manufacturers worrying they are reaching the "saturation" point, developing countries offer a growing market.

In Uganda, where three wireless companies compete for dominance, more than 330,000 of the country's 23 million people have mobile phones. That's nearly six times the number of fixed telephone lines. MTN, a South African company, is the largest provider.

"People know the value of communication. And it has become a fashion of the day. They think that if you do not have a cell phone, you will be left out in the 21st century," said Adrian Nsubuga, marketing manager for Uganda's MTN Ltd.

For years, analysts touted wireless communications as a way for developing countries to leapfrog older technologies. That has certainly come true in east Africa. But mobile phone companies have said they also need an improved fixed-line telephone system because they still need trunk lines as part of their infrastructure.

Some problems

The rapid growth has not come without some problems. Over Easter weekend, Kenyans overloaded Safaricom's system, resulting in outages and numerous angry letters to Nairobi newspapers. It also sparked a venomous marketing campaign by KenCell.

The cash-strapped Kenyan government has also jacked up the tax on mobile phone air time this year, adding a 5 percent excise tax on top of an 18 percent value-added tax.

Both companies publicly protested the tax, saying it would slow industry growth.

Vandebrouck and Joseph have taken different tacks for the future. Joseph said Safaricom will continue to concentrate on offering basic wireless services, while KenCell has amplified its offerings with wireless Internet, charging by the minute.

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