Econet salaries cuts: Eureka moment for the crown jewel

Reports that Econet Zimbabwe, the nation’s largest mobile phone company, will cut staff salaries by 35% with effect from July are turning out to be the eureka moment for the country’s corporate crown jewel.

Brighton Musonza

This development could have wider implications for the telecommunications industry and government as it signals a rapidly deteriorating state of the economy.

The situation follows the company’s dismal results for the year ended February 2015, which reflects revenues falling sharply on the back of the state telecommunications regulator, Potraz slashing tariffs as part of the government’s wider battle to deal with the general high consumer prices in the country.

Since its formation, the success of Econet’s generic strategies have always been to stay ahead of the game of its rivals by scanning the horizon for new business and innovative solutions to future problems. This has helped the company over the years to command the position of market leader, differentiator and more importantly, a focused player.

Econet’s strategy has been to position itself by leveraging its strength against that of its rivals — with innovation and high quality human resources recruitment.

In a tariff-based industry like mobile phone business; a minimum tariffs regime must cover the cost of providing the service to the consumer. If a telecoms operator cannot recover its costs, it will inevitably make a loss and the company can easily go bankrupt.

Tariffs are also used to cover maintenance, additional research and other indirect costs associated with providing the service. This is the burden that Econet faces.

To overcome these barriers, the overall business efficiencies and cost rationalisation will have to come into play for it to find elusive profit margins.

Over the years, Econet has done that very well.

How far it can sustain these strategies is the challenge that the company now faces on the back of being forced to do things impacting on the quality of staffing and service.

As part of its Long Run Incremental Cost (LRIC) model, the Postal and Telecommunications Regulatory Authority of Zimbabwe with effect from January 2015 introduced a 5% excise duty on airtime sales, a 25% duty on handsets, and a US5 cents levy per transaction on mobile money transfers and these have impacted negatively on mobile phone companies’ revenues.

Econet approached the courts and lost on the basis that the move was targeting them since its two long-time rivals, NetOne and Telecel have not invested much to improve their services.

The voice tariff cut and taxes on airtime and mobile handsets have seen Econet revenues tumble by a staggering 41% and threatening to upset the pace of growth for the country’s crown jewel. Obviously, Econet has passed the burden to the consumer, causing a huge outcry.

To explain the tariff changes in the context of the correlation between demand and pricing terms; call minutes on mobile phone are highly elastic against price and this means that the demand for call minutes varies greatly according to price.

A slight decrease in price leads to a great increase in call minutes. The higher the price, the more this effect is noticeable for consumers. This means that it is often the case that more revenue is achievable at lower prices, and the opposite is true when prices go up.

Caught between increasingly disenchanted consumers due to poor service delivery, exorbitant charges and hulking authorities harbouring nefarious political agendas, Econet will have to make sacrifices elsewhere from within its resources to make do with what they have to appease its customers and service its debt capital.

The challenge the company faces is to keep its customers happy with affordable prices and still achieve viable profit margins without eroding its subscriber base.

This has become difficult for Econet and the company has become target of attacks by its subscribers. On social networks, frustrated customers are increasingly venting their anger over its poor services and exorbitant prices.

The company that has sustained the government in the most difficult of times in the last decade and half feels tormented by the regulator, Potraz and government in spite of its immense contribution to the economy.

Since 2009, Econet has paid nearly US$1 billion in taxes and it is still by far the leading taxpaying company in the country. Late last year the local telecoms giant fully paid-up in full US$137,5 million for its 20-year licence which is far more expensive compared to regional standards. In South Africa it is only US$10 million.

Econet is also reported to have given the cash-strapped government a US$30 million facility last year to pay civil servants salaries and other critical bills.

Some view this as a manifestation of crony capitalism in Zimbabwe where business survival depends on close relationships with government politics.

Econet has 65% of the mobile market according to figures from Potraz.

That is translated into 9,2 million subscribers out of the country’s population of about 14 million.

In the year ending February 2015, the company has seen a decrease in investment; US$125,4 million (2014: US$281,3 million) on its network, but still it stretched its total investment above US$1,2 billion over the last five years.

It has invested this US$1,2 billion in infrastructure to date, a feat that has not been achieved by any other company local or foreign. On the stock market, Econet is the second biggest after Delta Corporation by market capitalisation and its latest revenue of US$752,7 million might as well be the highest from any Zimbabwean company.

In recent years, Econet has seen its profits decline such that in 2011 it recorded US$165 million profits and in 2012 profits was US$140,9 million and 2013 US$119,4 million.

The investment in the network is targeting additional two million to its current subscribers, who rose 5% to nearly 9,2 million over the year.

In its 2015 financial reports, the company’s capital structure is still bloated with a US$600 million debt capital but it is also healthy with sufficient cash in the bank. Debt to equity ratio in the last year improved slightly to 36% from 38% previously following an increase in debt repayments to US$98 million compared with US$76 million previously. The company says it is on course to pay off most of its debt within the next three years.

In the country’s banking sector, Econet is also dominant with effectively the biggest number of account holders through its mobile phone banking EcoCash. Its banking service is believed to have more than four million account holders compared to a million for the country’s entire traditional high street banks.

The company has injected a billion of investment in the economy and apart from its thousands of employees, it has created 21 000 jobs for those selling airtime recharge cards and 15 000 agents throughout the country.

However, in spite of all this economic contribution, the company is increasingly being viewed as parasitic by discontented customers.

The anger against Econet is growing — some of it justified and some of it being frustration due to falling disposable income.

The company has seen 18% decrease in marketing expenditure in what it says this is part of cost-cutting rationalisation, but this can also be viewed as part of its failure to engage more with its disgruntled customers amid reports of some customers using expensive bundles meant for emergency calls in their general calls.

However, the company is being unfairly treated in being forced to share its infrastructure with its competitors.

Both NetOne and Telecel owe Econet US$26,3 million in interconnection fees and in the last few years it has switched off its old foes twice and only a provisional truce presided over by Potraz has kept the arrangement running.

Of late, NetOne has been making incursions into Econet and Telecel subscriber base, adding more to its 18% increase in the pair’s subscriber total. From its 3,2 million subscribers, the state mobile company is now targeting five million subscribers. According to industry analysts, to achieve this NetOne simply has to maintain its quarterly 18% subscriber growth rate and boost its average revenue per user, currently at US$3,35.

NetOne is gearing for expansion in partnership with the Chinese telecom network equipment provider, Huawei. It has a US$218 million standing loan facility with China’s Eximbank, which will be used to boost its broadband internet capacity and expand its network.

Econet is a company founded against a background of official resistance and hostility. From its formation, its founder Strive Masiyiwa had to fight his way through.

Now Econet faces the weight of fiscal demands, an environmental of political gamesmanships favouring its rivals and a stringent tariff regime. It is difficult to see if it can work on its customer relationships and possibly shift its approach away from unit pricing and unit based tariffs to propositions that deliver much more value to customers in return for greater commitment, incremental penetration of the account or more balanced commercial costs.

The economic environment is increasingly getting tough with voice revenues declining the world over. In Zimbabwe the slowing down economic growth, falling disposable income, high interest rates, liquidity problems and growing deflationary pressure as inflation now sits at -2,70% are all starting to hit the industry’s revenue streams.

Econet is a company that has always aspired to uphold a high level of growth which has been a key factor in its huge success and whether it can still carry on applying all its successful strategies for the foreseeable future is another question for another day.

It is, however, correct to say its strategic options are limited because there is no way it can engage in some of the strategies taking place in mobile business around the world over where there are growing mergers and buyouts for economies of scale and growing subscriber base.

In recent years we have seen the company more focused on diversification – entering into the financial services sector and beverages, transforming itself into a fully-fledged conglomerate spreading its interests outside its core business of voice and SMS, broadband services and overlay services.

Diversification is set to hedge Econet’s investment and give it a growth strategy earning it new business markets, new products in new markets and drawing it away from the increasingly degraded lower margins in its core business of voice call, SMS and broadband.

Broadband overlay services remain the growth drivers to sustain revenue growth, focus on margin improvement.

But, diversification is inherently a risky strategy because the business is moving into markets in which it has little or no experience.

To overcome those problems, Econet would have had to rely on hiring talented professionals as it has done in the past.

However, it would be difficult to attract high quality professionals on competitive rewards against a backdrop of the new proposed salary cuts.

Brighton Musonza is an Asset Management Portfolio Client Accountant for a United Kingdom Investment company. He is also a student at UK Business School. Email: mmusonza@aol.com. This article was also published on www.thezimbabwemail.com