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Can EcoCash match M-PESA performance
Brett Chulu, The Independent (Zimbabwe)
June 22, 2012

http://www.theindependent.co.zw/2012/06/22/can-ecocash-match-m-pesa-performance/

There has been much hype about the potential of mobile money transfers as innovative sources to spur business growth of financial and non-financial players. However, what has remained a mystery in the case of Zimbabwe is data on the financial performance of these mobile money products. This non-disclosure of financial performance data makes it very difficult to assess the profitability of mobile money transfer products that have been launched in the past three years.

This article attempts to assess the potential of the EcoCash product, based on the performance of a similar mobile money transfer product - Safaricom of Kenya's M-PESA. We are in essence attempting to turn a mystery into a puzzle.

EcoCash - M-PESA similarities

The choice of EcoCash is based on a number of similarities shared with M-PESA (first mass-based mobile phone money transfer). First, Econet, like Kenya's Safaricom, is a telecoms player. More important perhaps is the fact that Econet and Safaricom are near-monopolistic players in their respective national telecoms markets. Even more intriguing is the similarity in the extent of their market dominance. Econet is said to have a market share of about 70%, which is comparable to Safaricom's 66,6% (previously 69,9%). Second, Kenya and Zimbabwe share similar mobile penetration rates. Zimbabwe's mobile penetration rate is estimated at 74%, while Kenya's is approximated at 71%. Third, the rate of first-year growth of EcoCash subscriber base is slightly higher than M-PESA's. According to the pronouncements by Econet's management, the current uptake of the Ecocash product is 200 000 subscribers per month, translating to 2,4 million subscribers in the first year. M-PESA's first year uptake was 2,08 million subscribers. Fourth, market share distribution among the rest of telecoms players is nearly similar. Kenya's mobile telecoms market is a four-horse race between Safaricom (66.6% market share), Airtel (15.2%), Orange (10.3%) and Yu (7,9%). Zimbabwe's mobile telecoms market is largely perceived as being a three-race horse between Econet, Telecel (about 15% ) and Netone (about 7%). For the avoidance of doubt, the market share figures are based on the estimates supplied by Econet in their 2011/12 full-year analysts' briefing. It is my assertion that Zimbabwe's mobile telecoms market is becoming a four-way race with Africom quietly gaining market share.

M-PESA customer evolution

M-PESA subscribers have evolved from 2,08 million to 14,91 million subscribers as at the close of Safaricom's 2011/12 financial year. This represents a staggering 616% growth over five years. As would be expected, M-PESA's subscriber evolution is sigmoidal (S-shaped growth pattern). M-PESA registered its biggest year-on-year growth in the first two years. In fact, a full year-on-year growth profile shows that during the 2008/9 financial year (shown as two years since inception), M-PESA subscriber growth was 197%. During the 2009/10 financial year, year-on-year subscriber growth tapered to 53%, dropping to 48% during 2010/11. A massive cooling-off of growth occurred during the 2011/12, with M-PESA subscriber growth tapering to a low of 6%. Safaricom's registered mobile subscribers stood at 18.7 million during 2011/12. Thus, as a proportion of Safaricom's M-PESA's mobile subscribers, internal penetration rate stood at about 79% during 2011/12.

The foregoing analysis on M-PESA customer volume evolution seems to point towards two trends in mobile money evolution. First, the growth of mobile money transfer subscribership is like straw- fire. We use a straw-fire construct to highlight that initial growth is very rapid, followed by a period of sharp decline in growth. Second, it would appear that the growth of mobile money transfer subscribership is controlled by a mobile telephone player's subscriber base. It seems that as a mobile transfer's internal penetration rate relative to its total mobile subscribership increases, growth of mobile money uptake tapers. As a corollary, it could be construed that there is a residual element among a mobile subscriber base that is not so keen on using mobile money transfer. This is shown by the growth of mobile money customers being far less than the mobile subscribers still to be penetrated by a mobile money transfer product.

M-PESA financial evolution

M-PESA's financial evolution could throw some light on the performance of mobile money transfer products relative to the overall financial performance of a telecoms player. The following is financial evolution of M-PESA: 320 million Kenya shilling (2007/8), 2, 93 billion Kenya shilling (2008/9), 7, 56 billion Kenya shilling (2009/10), 11, 78 billion Kenya shilling (2010/11), 16,87 billion Kenya shilling (2011/12). In terms of contribution to overall Safaricom revenues, the M-PESA revenue stream contributed 4% in 2008/9, 9% in 2009/10, 13% in 2010/11 and 16% in 2011/12. In absolute terms, M-PESA generated US$198 million during Safaricom's 2011/12 financial year. This M-PESA revenue figure is 16% of Safaricom's US$1, 258 billion revenue out-turn for 2011/12.

In terms of year-on-year revenue growth, M-PESA has evolved as follows: 691% (2008/9), 158% (2009/10, 56% (2010/11), 43% (2011/12). This contrasts significantly with the latter stages evolution path of customer growth. M-PESA revenue growth can be aptly described with a bon- fire construct--decline in growth after rapid seminal growth is followed by a steady decline in revenue growth. In fact, during 2011/12 M-PESA was the only product that registered real growth (above inflation rate of 15,6%). This signal points to the fact that mobile money transfer does offer scope for sustainable above-average growth over the medium term. Interestingly, though M-PESA subscriber growth tapered off to 6% from 48%, revenue growth slowed from 56% to 43%. This anomaly seems to point towards an increase in higher-value transactions possibly due to the mobile money product finding traction among corporates.

Analysing M-PESA's revenue-generation per M-PESA subscriber shows that average annual revenue per M-PESA subscriber has risen to US$ 13. This is a key metric that gives us a glimpse into the revenue-generating capabilities of mobile money transfer over time.

Extrapolating to EcoCash

In order to estimate the likely evolution of financial performance of EcoCash, it is assumed that M-PESA evolution provides a good guide.

We do not expect EcoCash to follow an exact path for good reasons. First, Kenya's telecoms regulatory environment differs in a key aspect - active price regulation. Kenya has actively forced telecoms players to slash tariffs, the year 2009 being a case in point. That seriously impacted negatively on Safaricom's EBITDA (Earnings before interest, taxes, dividends and amortisation) margin performance.

During 2008/9 Safaricom posted an EBITDA margin of 45.9%, plummeting to 39.7% during 2009/10 due to 40% cut in tariffs as a result of regulatory fiat.

In 2011 Safaricom experienced a greater than 60% cut in tariffs, shaving EBITDA to 35%. It is interesting to know that before tariff cuts Safaricom's EBITDA is comparable to Econet's EBITDA of 49% (2010/11) and 49% (2011/12).

Second, the nature of competitive pressure Safaricom is facing is significantly more intense than what Econet is encountering.

Safaricom faces tough competition from international telecoms players such as Orange. In fact, Safaricom is losing market share to Orange as reflected by official market share data. Econet is arguably shielded from intense competition due to the absence of big international telecoms player.

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