* Price wars to pressure Safaricom's margins
* Product diversity offers room to manoeuvre
* Safaricom has 78.3 percent market share
By Duncan Miriri
NAIROBI, Aug 26 (Reuters) - Kenya's Safaricom can lean on data services like mobile internet and money transfers to fend off intense pressure from rivals for voice revenues that has pummelled its shares and will squeeze its margins.
Zain, newly acquired by Bharti and Kenya's second-biggest provider by number of users, last week lowered its calling rates by half after the country's regulator cut the interconnection rate by a similar rate.
Zain's move prompted investors to fret about Safaricom's ability to maintain its 78.3 percent market share, sending its shares to a six-month low as brokerages cut target prices.
But Safaricom has weapons to fire back.
"There is scope for price cuts with reference to mobile broadband services, where costs are still high," said Nicholas Jotischky, principal analyst at London-based Informa Telecoms and Media.
"If Kenyan operators can get this pricing right, there is huge opportunity for data revenues to help offload sliding voice revenues."
Safaricom reported a profit before tax of 20.97 billion shillings ($258.2 million) on revenues of 83.96 billion shillings during its year ended in March.
While data accounted for less than 20 percent of revenue, it represented the fastest growth, jumping 72 percent year on year, lifted by internet services, money transfer (M-Pesa) and short messaging services.
M-PESA A KEY STRENGTH
Mobile internet is popular in Kenya, with operators offering flat rates or charging per usage. Safaricom has both pricing models, but most users prepay and are charged by how much they access the internet.
Renaldo Desouza, an analyst at Genghis Capital, said money transfers also gave Safaricom a leg up.
"One of the key strengths of Safaricom is M-pesa which has made great strides and is very popular despite its relatively high charges," he said.
In a demonstration of foresight, the firm started to focus on developing M-Pesa and internet provision -- rolling out its third generation (3G) internet access network in 2007, long before its rivals.
"They are always on top when it comes to launching value-added services," Desouza said.
While Safaricom considers its long-term strategy, it has already cut calling rates for a month in response to Zain's move, offering support to its shares in Tuesday's session.
Prepaid users can now call other Safaricom numbers for as little as 2 shillings, down from 8 shillings previously. Zain's new rate is 3 shillings to all networks.
"The announcement that Safaricom is cutting its rate to 2.00 shillings effectively checkmates Zain because 80 percent of Zain's calls end on Safaricom's network and the interconnection fee is above 2.00 shillings," said Aly Khan Satchu, an independent analyst.
Informa's Jotischky said mobile tariffs across Africa are high compared with other emerging markets like India.
"This suggest there is some elasticity as does the fact that average revenue per user levels are significantly higher in India than across Africa," he said.
DATA COSTS TO FALL
Eric Musau, an analyst at African Alliance, said data can help soften the sting to Safaricom's margins before rates fall in that area as well.
"Data will increasingly be commoditised so we will see a lot of competition coming in there, but if you look at the competition... you still have some lead time for Safaricom to reap high margins on data," said Musau.
Zain plans to install its 3G network by the end of this year while Telkom Kenya, controlled by France Telecom, is also planning to launch its service soon.
Telkom also cut its calling rates to 2 shillings for calls within its network and 4 shillings for calls outside its Orange mobile phone service.
Still, Musau said the two operators -- along with the smallest, Yu, which is owned by India's Essar -- would find it hard to offer competitive rates in data due to the massive initial investments required.
"Safaricom would be in a better position to revise its tariffs downwards," he said, citing the 3G network which it has had for three years. It is already testing a 4G network.
Johnson Nderi, an analyst at Suntra Investment Bank, said Safaricom's trump card is M-Pesa, which had 11.9 million customers in July, up from 10.2 million the previous month.
The total value of funds transferred on the service swelled to 33.32 billion shillings in July from 28.59 billion in March.
"They have got M-Pesa, they have got a strong loyalty programme. Now what they need to do is just leverage on that. If they can match Bharti's prices...usage will increase even with shrinking margins, revenues could even go up," said Nderi. (Editing by Richard Lough and Michael Shields)