At the end of the movie Annie Hall, Woody Allen says,

this guy goes to a psychiatrist and says, ‘Doc, uh, my brother’s crazy, he thinks he’s a chicken,’ and uh, the doctor says, ‘well why don’t you turn him in?’ And the guy says, ‘I would, but I need the eggs.’ Well, I guess that’s pretty much now how I feel about relationships. You know, they’re totally irrational and crazy and absurd and, but uh, I guess we keep going through it…because…most of us need the eggs.

And I guess that is pretty much how I feel about mobile access in Africa.  People pay irrational amounts of money for mobile services and they keep doing it because communication is a fundamental human need and, for most, mobile is the only access available.  Yet at the same time, mobile operators in Africa are making jaw-dropping profits.

Now the conventional wisdom about this is that this is a win-win.  Indeed, if you read opinion pieces such as this April 2009 article by Rohit Singh (a researcher at the Overseas Development Instiute) entitled “Mobile Phones for Development and Profit:  A Win-Win Scenario“, you will get the impression that most “m4d” researchers seem to give, namely that there is very little downside to mobiles from a development perspective.  Rohit says, “mobile operators are able to make large profits in the developing world, while delivering development benefits.”  On the surface this is hard to contest.  There has been convincing evidence since 2005 that mobile infrastructure deployment is well-correlated with economic growth.  Anecdotal reports abound about the transformational effects of access to mobile communication and new mobile services such as m-banking.

So what’s the big deal?  The problem is one of proportion.  It offends our sense of morality when people profit unduly at the expense of others.  I’d like to expand on this a little through a comparison with a classic experiment in behavioural economics called the Ultimatum Game.  In this experiment,

two players interact to decide how to divide a sum of money that is given to them. The first player proposes how to divide the sum between themselves, and the second player can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal.

So, let’s imagine that you and I are playing the game and I, as the first player, receive a hundred dollars.  If I decide to split the money evenly, I imagine that you would accept the deal.  If I cut myself in for a little extra, say sixty dollars, I imagine you would still take the forty dollars remaining.  But at some point as I get a little greedier, I think you might be likely to say “Forget it! I could use the twenty dollars but not if that bum is going to keep eighty!” and you would use your power to cancel the deal even though you stand to lose twenty dollars.  Turns out that the average tipping point for this change of heart is around 70/30.  This is from thousands of instances of this experiment across a variety of cultures.

Why do we do that?  Why do we act in a way that is not to our economic benefit?  The answer is this.  We are social beings and social fairness is hardwired into who we are.  Watch Jonathan Haidt’s Ted Talk on Morality and you’ll see the same answer.  A desire for social equity and fairness is a part of being human.  In fact, it is not just human.  Higher order animals exhibit the same traits of social fairness and equity.  But it does seem weird when you think about it.  Imagine yourself walking down the street and you spy ten dollars on the pavement.  Happy day!  Lady luck has smiled on you.  Yet, imagine the same scenario with you walking down the street with someone else.  They spot a pile of twenty ten-dollar bills.  They peel off a single bill and hand it to you.  You’re still ahead the same amount but somehow there is no sense of “happy day”.  Instead the dominant emotion is likely to be one of anger at the injustice being perpetrated.

And that is how I feel about mobile operators in Africa.  The proportion is wrong and I mean wrong in the basic moral sense of right and wrong.  As I have pointed out before, Kenyans spend more than 50% of their disposable income on mobile communication.  Income that might otherwise be spent on building a savings account, their children’s education, investing in a new business, etc.  Of course that income might also be spent on booze, cigarettes and companions of questionable virtue but let’s give ourselves the benefit of the doubt.

Let’s put that 50% of disposable income up against Safaricom’s half-year profit statement from 2008.

2008 ½ Year Statement KES USD
Turnover 34,508,000,000 456,885,920
Cost of Sales -15,309,000,000 -202,691,160
Gross Profit 19,199,000,000 254,194,760
Distribution, Admin & other costs -4,194,000,000 -55,528,560
EBITDA 15,005,000,000 198,666,200
Depreciation & Amortization -5,432,000,000 -71,919,680
Financing & Forex Costs -597,000,000 -7,904,280
Net Interest Payable -274,000,000 -3,627,760
Forex – Operational -323,000,000 -4,276,520
Profit Before Tax & One-off Items 8,976,000,000 118,842,240
Taxation -2,759,000,000 -36,529,160
Profit After Tax 6,217,000,000 82,313,080

The above points to Safaricom making about a billion USD a year in turnover with over 50% of that being gross profit.  Cash in the bank profit of around USD 170 million… in one year.

Keep in mind who owns Safaricom.  The Kenyan government own 35%, Vodafone UK own 40%, and the other 25% (sold off in last year’s IPO) is spread out among Kenyan and international investors.  They are the groups that stand to benefit from Safaricom’s profits.

Back to the Ultimatum Game.   Are you feeling it yet?  Do you think, if given the choice, that the average Kenyan spending more than 50% of his/her income on mobile communication would exercise their power in the Ultimatum Game to cancel the deal?  The unfortunate answer is no.  No matter how disproportionate the division of wealth, Kenyans (and indeed all of us) need access to communication.  We can’t afford to say no.  We need the eggs.

So what is the incentive for the owners of Safaricom to offer a more equitable deal?  If you’re Vodafone, there is no incentive.  Their commitment is to maximising profit for their shareholders.  They’re wondering just how little they can offer and still have the deal accepted.  But the Kenyan government obviously has an incentive to offer a better deal.  They represent Kenyans.  Unfortunately, the Kenyan government is also interested in the revenue from cash cow that is Safaricom.  Safaricom’s IPO raised USD 800 million for the Kenyan government last year.  However, even with the best will in the world, it is unlikely that Vodafone would have allowed a public-spirited Kenyan Government to drive down Safaricom’s charges.

So what needs to happen?  Better market regulation for a start.  Regulators have two basic mechanisms for helping the market to operate effectively.  They can intervene remedially to correct market imbalances where operators such as Safaricom enjoy significant market power or they can act to introduce new market entrants to increase competition in the market.  The history of remedial interventions in telecoms regulation in Africa is not littered with successes.  Telcos are typically better equipped with lawyers and researchers than most regulators.  My guess is that the only real hope lies in increased competition.  Given that Safaricom have 80% of the market, this is likely to be challenging.  I suspect that real change will only come when when the barriers to market entry are dramatically dropped.

When is this likely to happen?  Only when there is public pressure from civil society and industry alike to say that pervasive and affordable voice and data is more important to Kenya’s social and economic future than the profits of the largest company in East Africa.

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Posted by Steve Song

@stevesong local telco policy activist. social entrepreneur. founder of @villagetelco
#africa #telecoms #opensource #privacy #wireless #spectrum #data

  • Thank you for this, it’s so true that the absolute lack of regulation plays a big role.

    It’s hard for them to justify this with PR, and CSR activities. We need action, but haven’t a clue where the impetus will come from.

    It does leave you with a bad taste in your mouth, and the fact that there will always be other issues of greater pertinence to civil societies means that it will be a while before they lobby against Safaricom, or the mobile phone industry.

    Gotta bookmark this, would love to see what people’s views are.

    Thank Steve.

  • Hi Steve… well written post… hope you are well?

    I don’t know enough about Safaricom’s organizational architecture, but many US based companies typically would argue that bigger profits lead to bigger investments in R&D and further infrastructure outlay.

    I know that Eldoret, Kenya has recently been upgraded to 3g data. I know that other segments of Kenya are also growing bandwidth capacity.

    Just to throw another perspective in… is it possible that some of these profits are going back into growing the East African telco infrastructure?

    This might make the disproportionate profits a bit more palatable.

  • Steve Song

    Hi Paul.. thanks and just fine. Trust you are the same. 🙂

    Every mobile operator will say they need to charge what they charge in order a) build out the network; b) deliver quality of service; c) cope with the spiraling cost of diesel for cell tower generators; or d) insert other difficult to disprove proposition. All of that is simply to maintain the extremely lucrative, comparatively-non-competitive status quo that they currently enjoy.

    As you point out, mobile operators like Safaricom obviously are investing in infrastructure. Things are getting better and prices are coming down, albeit very slowly.

    My point is that things could be much, much better, with a little competition and of course everything running over IP. 🙂

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  • Great post!

    And food for thought. It seems that in the current worldwide economic crisis Safaricom is increasingly becoming aware of that people in Kenya might not be putting up with the ultimatum.

    Have a look at the recent news:
    http://mmd4d.org/2009/05/22/kenyas-safaricom-takes-a-pasting-has-economic-contagion-finally-reached-the-booming-markets-of-africa/

    Thanks!

  • More things to consider regarding the ultimatum game:

    http://mmd4d.org/2009/05/29/mobile-money-by-m-pesa-a-need-or-a-luxury/

    In an interview, Michael Joseph, CEO of Safaricom refers to falling ARPUs and the use of mobile services such as M-Pesa as ways to reducing users switching among operators.

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