Out of Africa: Safaricom's large profits co-evolve with African broadband gap

For anyone who still thinks that poverty alone holds back the growth of telecommunications in sub-Saharan Africa isn't reading the financial results from Safaricom, a Kenyan mobile-phone operator that is controlled by Vodaphone, the giant British mobile conglomerate. As recently as 2000, Safaricom was a struggling phone company in East Africa, with just 20,000 customers. Eight years later, the Nairobi-based Safaricom now has 10 million customers. More impressive, Safaricom earned a whopping $223 million in its financial year ending in March, 2008.

Communications networks are key to technological and economic development. Safaricom, as a new article from The Economist amply documents, is one of Africa's pacesetters. The Economist wants readers to believe that Michael Joseph, the company's chief, has found a way of profiting from African poor, providing pay-as-you-go service to plain folks who can only afford to dish out money for mobile calling in small increments.

The Economist quotes Joseph, who spent his youth in South Africa, as saying that the increased availability of mobile-phone lines -- a new one costs as little as one dollar in Kenya -- "has been hugely more effecient than aid."

That's open to debate. Safaricom's success underscores the rise of a new upper-class in Africa's fastest-growing countries, of which Kenya surely counts as one. Mobile telephone providers are essentially skimming the cream from the top of Africa's economic "tigers." Safaricom is only the most successul in doing so.

To be sure, the company has distinguished itself from rivals by innovating a key service that does assist the poor. The service, called M-PESA, allows customers to transfer electronic money to one another through text messages. The Economist says M-PESA moves about $1.5 million a day across Kenya. That's still only a tiny fraction of what Western Union and Moneygram and mainstream banks move electronically, but it is indeed an impressive achievement.

As The Economist concludes: "Mobile banking could be the next stage of mobile-driven economic transformation."

Privately-owned companies such as Safaricom will surely take leadership roles in this next phase. But they cannot do it alone. Africa remains hampered by significant gaps in public infrastructure. In the latest issue of Science magazine, Calestous Juma, a professor at Harvard University, argues that African governments must do more to bring "affordable connectivity to Africa in general."

Juma insists that international aid donors do have a role to play in this transformation -- to help insure that "bandwidth must be sold at a fair price to all buyers" rather to the monopolies emerging in Africa's telecom markets.

Good point. Which brings us back to Safaricom's enormous profits. Whether they are extracted from the bulging wallets of East Africa's new wealthy or more "democratically" removed from the working poor, Safaricom's impressive earnings fundamentally flow from very high prices.

In Africa, per unit costs for mobile phone calls are among the highest in the world -- and Kenyans pay some of the highest rates in Africa. In the long run, the combination of technological change and competition should drive down those prices. But not any time soon.

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