Kenya’s Internet Boom

The liberalization of regulatory controls in Kenya and the resulting improvements in infrastructure are fueling a boom in demand for internet services in this sub-Saharan African country which boasts the region’s third largest internet user base. New internet backbone licenses, the legalization of VoIP, and a license consolidation scheme for ISPs have injected competition into this market, helping to increase available bandwidth and improve quality of service in order to meet consumer needs. Despite the country’s incumbent (Telkom Kenya) being plagued by declining market share, falling revenues, and a swollen payroll, internet penetration in Kenya will continue to rise rapidly as improvements in service and declining tariffs (led by sector reform) fuel demand. 

Sector Reform Improving Infrastructure, Stimulating Demand

Recent regulatory measures such as new backbone licenses, the legalization of VoIP, and an ISP license consolidation scheme have ameliorated internet infrastructure and stimulated demand for IP services in the country. Some of the resulting developments stemming from sector reform include:

The country’s regulator—the Communications Commission of Kenya—issued a total of six internet backbone and gateway services licenses since Kenya’s telecom sector was liberalized in 2004. Breaking the incumbent (Telkom Kenya’s) monopoly on regional backhaul with the issuance of new licenses is already reaping rewards—new entrants led by Kenya Data Networks (KDN) have invested over US$10m in infrastructure in the first year alone. With a new government-sponsored internet project office (funded by the International Internet Society) helping coordinate infrastructure investments among new entrants, the last of the new entrants, Uunet Communications, announced in September 2005 that it had set aside an initial US$2.2m to kick-start its backbone venture.

With VoIP being legalized in early 2005, demand for telephony and internet services in the country has begun to rise at an even faster pace. VoIP enables operators to pass substantial international long-distance call savings directly onto their customers., VoIP’s introduction in 2005 brought the average price per minute of an ILD call down from US$1.23 in 2004 to US$0.09 in 2005. The resulting price decline has stimulated demand to such an extent that the regulator was forced to amend existing licenses for Kenya’s largest ISPs to include VoIP services.

Finally, with the expected completion of EASSy (Eastern Africa Submarine Cable System—a fiber optic link connecting the entire African continent) by 2007 and the installation of a fiber optic link between two of Kenya’s largest cities, Nairobi and Mombasa, available bandwidth for telephony and internet applications is further set to rise in Kenya. This will result in a further reduction of end-user tariffs as Kenya reduces its dependence on the use of satellites to route traffic, stimulating increased demand in the country over the coming years.

Telkom Kenya Scrambles to Keep Its Edge

The increase in competitive pressures felt by incumbent Telkom Kenya (due to the liberalization policies undertaken by the regulator) has forced it to restructure its operations and revamp its services offerings in order to stem the fall in revenues and tap into the country’s rapidly growing internet user base.  Some key steps undertaken by Telkom Kenya to reestablish itself within the Kenyan market include:

Telkom Kenya’s first launch of ADSL services to end-users in the country in September 2005 beginning with a reseller agreement with Wanachi Online and extending into the creation of its own ISP service named Jambo ADSL, Jambo Dial-Up, and Jambo Mail. Through this launch and re-branding effort, Telkom Kenya hopes to attract 50,000 ADSL subscriptions by 2Q06.

Telkom has contracted Huawei to supply a prepaid VoIP gateway allowing customers to make VoIP calls from existing wireline phones using the “Telkom Big 5” calling card. This solution allows the company to target the majority of the population, which does not yet have access to a computer but would like to take advantage of the lower per-minute tariffs promised by VoIP. Pricing for international calling has begun to reflect the competitive pressures on the Kenyan market. For instance, in February 2005, Telkom announced a price reduction of 69 percent on its ILD tariffs via its JamboNet VoIP service. However, this was immediately followed by competitor KDN offering ILD tariffs that were 50 percent lower than Telkom Kenya’s revised tariffs. The ensuing price war which has developed between the incumbent and new service providers on VoIP call tariffs has helped augment internet use in Kenya, with subscriptions rising by as much as 650 percent (to reach 1.5m subscriptions), over the 2000–2005 period. Unfortunately, rapidly decreasing prices have been confined to dial-up and ILD VoIP call tariffs, and have not helped make broadband connectivity in Kenya a reality yet, with 256Kbps ADSl connections currently priced at US$258 per month. However, a reduction in broadband access rates is not far behind, as the pace and intensity of competition in the country suggest.

Telkom has also reported looking into wireless broadband solutions. In addition, to curb its revenue decline, the incumbent is set to reduce its 17,480-person staff down to 5,200 and then enhance training for these remaining employees.