It is often noted that people in emerging markets spend much greater portions of their incomes on communications than they do in developed countries. Low-income Indian mobile users we recently surveyed reported spending about 4% of monthly income on mobile service. People in the lowest household income bracket (up to US$750 per year) had mobile phones that cost on average 5.5% of their annual household income. In contrast, we estimate that the average US mobile user spends less than 0.4% of household income on a handset.

Findings like these are frequently offered in support of the idea that demand for mobile communications in developing countries may be less elastic than we think: the utility of mobile communication may be great enough that people will spend what seems at first blush like “too much.”

 But the demand for gaining access to communications by getting a handset is different from the demand for using it by making calls and sending texts.

 The hardly radical concept that charging less for communications services will increase usage is being tested in several places in Africa, notably Kenya, where new entrant Bharti Airtel has started a price war: 

•   In August 2010 Airtel (then still Zain) cut tariffs in half, from 6 to 3 shillings (US$ 0.073 to US$ 0.037) per minute. Not content with that, in January of this year Airtel cut rates again, to 1 shilling for calls made between 6AM and 6PM. Airtel reports that MOU tripled after the first reduction.
• Market leader Safaricom, whose Uwezo tariff is 2.24 shillings on-net/3.39 off-net*, is less than amused by this latest cut and has publicly complained about it. Telkom Orange has also filed a complaint with the Communications Commission of Kenya (CCK).
• The CCK has blandly expressed a lack of concern, noting that “'We do not see the low tariffs having a negative impact to the economy.” Other parts of the government – particularly the revenue department, which saw airtime VAT collections drop by 37% in Q4 2010 – are not so blasé, and an inter-ministerial committee is being convened to study the impact of low tariffs.

But if inter-ministerial committees in Kenya move as slowly as those on the rest of the planet, Kenyan consumers should be able to enjoy current low rates for a good long time.

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*Strategy Analytics’ Teligen group provides detailed tariff information on dozens of countries, including Kenya, South Africa, and Egypt.

Update 7 March 2011. At least one senior regulator, Dr Bitange Ndemo, who heads the Ministry of Information and Communications, has come out in favor of price floors.  On the other hand, Prime Minister Raila Odinga was quoted a couple of weeks ago saying he thought a price war would be beneficial.  As I say, this could take a while to sort out.

At last Bharti Airtel became the first Indian company to have presence in 18 countries. Bharti closed the Zain deal at $10.7 billion, which many equity analysts believe is an expensive deal, but Bharti’s African foray is a long term bet and only time will tell what future holds for Bharti in Africa. At the moment, Bharti is busy negotiating with Indian IT vendors for outsourcing African ‘non-core’ operations, something which it successfully did in the Indian market.

On the face of it, Bharti has got what it had been looking for years- presence in Africa, which it desperately needed, as its profit margins in India have been under pressure due to the massive domestic tariff war and the stiff competition provided by as many as 14-15 operators in each circle in India. Realizing the potential that African countries have, Bharti twice tried to acquire MTN but failed. Now, it has managed to get Zain in its kitty.

In January this year when Bharti acquired a majority stake in Bangladesh’s Warid, I wrote in my blog  ( http://blogs.strategyanalytics.com/gwp/?p=28 ) that Bharti would not benefit by foraying into small individual pockets like Sri Lanka and Bangladesh. Acquiring Warid immediately after the MTN deal was called off clearly showed that Bharti became much more aggressive in its acquisition strategy. At that time, Bharti was desperate and ambitious and looking for some big catch. I think Zain came at the right time as it fulfilled Bharti’s ambitions to become one of world’s largest operators. 

Challenges will always be there but Bharti’s presence itself in Africa is enough to give jitters to its competitors, especially MTN. After dealing with MTN, Bharti is very well aware of their operational strategies, which is an advantage to Bharti. Its competitors will feel the pinch with Bharti’s outsourcing and low-cost model. Don’t know how MTN will deal with it but Bharti has certainly made a right move.

But I hope that this deal will see the light at the end of the tunnel and won’t turn out to be a disaster like MTN for Bharti.