Robert Schumann, a Manager at Anaylsys Mason, examines Kenya’s forward-thinking approach to 4G network-sharing.
The Kenyan government has recently put forward a plan to simultaneously promote cost-effective use of the 2.6GHz band and save operators from having to spend money in an auction. The plan is to offer the management of the band (up to 190MHz of spectrum, which is suitable for high-speed mobile data services) to an independent company in order to create an open access wholesale network. Operators would purchase capacity from the company, and bundle it into packages and products that they would sell in a competitive market to retail customers. The end result would be a single, highly utilised network with low unit costs.
The plan sounds good, but the country’s government could be ‘jumping from the frying pan into the fire’.
The frying pan may not have been that bad, after all
Why does the Kenyan government feel wary of assigning spectrum to individual operators? The reasons suggested by Bitange Ndemo, Permanent Secretary of the Ministry of Information and Communications, include:
- high prices paid in an auction lead to high prices charged to consumers
- operators failing to honour roll-out commitments
- an auction would have 19 potential buyers and room for only three winners, so would discriminate against those that could not afford it.
Do high auction prices lead to high prices for consumers? Actually, it is the other way around: if operators can charge high prices, they will be willing to place high bids at auction. Service providers can charge high prices if there is limited supply of their product or of reasonable substitutes – and low auction prices do not guarantee low service prices. Furthermore, it is possible to design award processes to achieve ends other than extracting maximum revenue.
The 2.6GHz spectrum is unlikely to attract 19 serious bidders, given that it is relatively poor for providing coverage outside urban areas. A new entrant operator that aims to launch services based on this spectrum may be aiming to target a niche, such as medium-sized and large enterprises in urban areas. Giving them a chance to do this may be useful, but not as useful in expanding access to broadband as, for example, raising money in an auction to fund rural access.
Think carefully before jumping into the fire
Kenyan policymakers have correctly identified that greater supply (and more competition) is the key to reducing mobile broadband prices. They have also commendably declined to squeeze auction revenue out of operators. However, their solution turns away from infrastructure-based competition, which has revolutionised the telecoms industry during the past few decades. Will their alternative approach, which focuses on retail competition, work?
The bad news is that pure wholesale business models for mobile data have not done well in the past. Reasons include difficulty in developing ‘one-size-fits-all’ wholesale tariffs, absence of profitable voice services, and dependence on the strategy and performance of other operators.
The better news is that network-sharing deals can work. Operators around the world are signing deals to share radio access networks.1 In all likelihood the critical feature is that the retail operators have a strong interest in the entity that runs the network: financial interest to ensure that it makes a success of the services, and management interest to allow flexibility and tailored ‘tariff plans’.
Tantalisingly, the arrival of Indian-style telecoms in Africa (led by Airtel, among others) may naturally lead to greater sharing (and price cuts), without the need for government intervention.
It is clear that making this 4G plan work in Kenya will be a challenge for the selected network manager (a “group from the USA” has been mentioned as a candidate). It will be even more of a challenge for those charged with negotiating an agreement and monitoring its performance.