Price wars have always been a controversial topic of discussion at industry seminars and forums. My recent interest in the issue has dragged me into numerous dialogues and debates with colleagues and counterparts from markets at different stages of evolution – in regions covered by the Expresso group as well as other regions. Very interesting insights have emerged from Greece, Tanzania, Indonesia, India and Kenya. Everyone is grappling with two fundamental questions:
1. What is a price war good for?
2. Who are the winners in a price war?
Price wars are usually started by an operator with an aggressive desire for increasing market share. This is exactly what happened in Greece when one of the operators decided to break the market equilibrium. Within three months all the market players had responded with counter offers. The result for the total market at the end of the year was a revenue decrease of 13%, a reduction of €500 million from an overall revenue of €4.7 billion. The impact of price wars is not contained within the mobile telecoms operators: governments feel the heat too, especially in economies with heavy dependency on telecoms taxes. In Tanzania, price wars amongst mobile phone operators have been blamed for reduction in value added tax (VAT) revenue collected during the early part of this year. According to the Bank of Tanzania's Monthly Economic Review of March, the impact was a reduction of 6.4%. As VAT is a function of spend, this implies a reduction in total spend by the population. Of course the operators have seen an overall increase in traffic, but this is clearly not compensating for the proportional price decrease. Asian markets are often compared with African regions for similarities in consumer behaviours. In addition to analysing the consumer behaviours in our own markets, we looked at the Indonesian telecoms market experience from the price wars of 2007; and India's most active period during 2009. Our review has shown that although these are different markets, there are many similarities in consumer behaviours during price wars.
The three major behavioural trends observed were as follows:
• High churn rates, especially the monthly rolling count
• Increased multi-SIM ownership
• Smart usage management leading to consumers getting more for less spend
In some markets the lead operator is so dominant that all the other players are loss-making entities. Often these smaller operators find themselves in a 'do-or-die' position: either to grow their loss-making businesses or to exit the market completely. In the last few months of 2010, the Kenyan mobile telecoms market experienced a lot of excitement and change. The market leader in Kenya with 78% market share was estimated to have 16 million subscribers; the competitor with two million subscribers was a loss-making operation. They took the decision to go with aggressive price cuts and call rates were dropped by 50%. The resultant gain in new customers was so substantial that the network's quality of service dropped significantly. In many industries the winner during a price war is always the consumer. In mobile telecoms the same can be said to be true, but only in the short term. During the early days of price wars the consumer reaps the most rewards. In the long run, in all the cases evaluated the sequence of events is very similar. There is increased traffic but a decrease in overall market revenues, congested networks lead to lower quality of service and poor user experience, more pressure for the operators to run leaner operations, reduced R&D and limited innovations. Eventually the losing operators quietly disappear. Competition is healthy in a market even in the form of intense price competition, but price wars without appropriate value analysis leads to prices that are not sustainable in the long run. In this type of price war everyone loses. A logical follow-on question is: what can operators and consumers do to avoid the detrimental price wars destroying markets? The answer to this question requires a discussion space of its own, perhaps in the near future.