This week’s mobileYouthTV episode is part of our month long series on youth loyalty. Mobile operator price wars are nothing new. From Indonesia to India and now Kenya. We look at operator price wars in the three markets and draw on learnings from them. How do these price wars unfold? How do they affect operators and their KPIs? How do they affect youth mobile behavior?
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From Indonesia to India to Kenya- we take a look at the effects of mobile price wars in 3 youth markets.
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The beginnings of a price war in Kenya
On August 18, 2010 Kenyan mobile operator Zain slashed its prices to an all time low of 3 Kenyan Shillings (Kes.) for a call to any mobile network in Kenya. The Communications Commission of Kenya (CCK) had announced a 50% price reduction on mobile network interconnection rates earlier the same week. Bolstered by the Bharti Airtel takeover, Zain implemented Airtel’s infamous low-cost, high volume model that had made it popular and successful in India – at least in the beginning.
Zain’s price cuts caused an influx of new customers towards the service provider. The interconnection network Zain had with Safaricom – the dominant service provider – was not able to handle the increase in traffic and as a result clogged up leading to poor service. Meanwhile another service provider, Yu, announced new call rates of Kes. 3.00 and SMS rates of Kes 0.50 – half of Zain’s SMS rates of Kes. 1.00 per message. On August 24, 2010 Safaricom joined the price wars with subscriber calls at the rate of Kes. 2.00 per minute. The price wars had begun in earnest.
Learnings from the price wars in Indonesia
Price wars are nothing new. The Indonesian mobile market is emerging from a debilitating operator price war of its own. In 2007, competition from a new entrant Hutchison, a rebranded Axis and CDMA players like Mobile-8 and Bakrie Telecom caused aggressive responses from Indonesia’s big three operators (Telkomsel, Indosat and XL) in the form of discounted plans month after month.
In response to the slashing of prices, mobile youth owners adjusted their behavior in three ways:
1. Rise in dual ownership: With all operators competing to see who can offer the lowest call and message rates, young consumers found it useful to own SIM cards from multiple service providers to take advantage of different discount schemes at the same time. Penetration rates among 25-29 year olds went from 70% in 2007 to 120% in 2008. Rise in multiple ownership caused revenue dilution for operators as the monthly mobile spend got distributed across various operators.
2. Decreased spending: With rock-bottom prices available every month, revenues took a hit. Mobile youth revenue in Indonesia peaked during 2008 at $3.4 billion and has been declining ever since.
3. Hunt for the cheapest plan: With every operator introducing a new discount scheme each month, young mobile owners took it among themselves to find out which plan was the cheapest for their particular need. They also put in the effort to mix and match various discount schemes from differing operators to benefit from a self-created optimal plan. Youth churn rates increased to above 50% in 2008 and have been increasing gradually.
While it might seem like young subscribers benefited from the low cost, in fact the opposite is true. As youth subscribers switched from one network to another with each new discount plan, networks experienced congestion due to a sudden influx of subscribers. Calls and messages between subscribers did not go through, causing much customer dissatisfaction. This was inconvenient for the youth subscriber and operators lost their trust due to the bad experience. Mobile service operators are now perceived as commodities available at a cheap discount rate offering disappointing customer service rather than strong global brands that the youth demographic would like to identify with. No wonder there is no brand loyalty among youth when it comes to mobile operators.
India: Different market, Same story
The Indian youth mobile market is mimicking the same pattern as Indonesia. Price wars among operators in India started in 2009 when new entrant Tata DoCoMo launched its GSM services under the “1-paisa-per-second” billing plans. This meant a 1 minute call cost $0.012. MTS India following with 50 paisa per minute ($0.011 per minute) and Uninor offered 29 paisa-per-minute (U$0.006 per minute) during its December 2009 launch.
As price wars heated up in 2010, youth churn rates crossed 50% and number of churned accounts increased to 144 million. Indian mobile operators stand to lose $6 billion due to youth churn in 2010. Not only that, the ever growing revenue bandwagon is also set to plateau as youth ARPU continues its downward slide from $10 in 2006 to $6 in 2010. Penetration rates are set to cross the 100% mark among the 20-29 age group in 2011 making dual SIM ownership a stable behavior trend much like Indonesia.
Indian operators have much to worry about as Bharti Airtel’s net profit fell to $361 million for Q2 2010 from $531 million in Q2 2009. Also, Vodafone India’s APRU fell from $5.3 in Q2 2009 to $4.1 in Q2 2010. It is humbling to see the biggest youth mobile market (280 million subscribers from among 555 million youth) fall prey to price wars that do not benefit the operator or the customer.
So going back to the beginnings of a fresh new price war among operators in Kenya, how do you think it’s going to unravel?
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