The Safaricom fairy tale is clearly having a reality check. In almost one decade, Safaricom grew from being a low quality Kenyan mobile network with a few thousand subscribers to the most profitable company in East Africa with over 10 million subscribers. However, in the last couple of years, so much has changed in wonderland.

Safaricom (now) has three formidable competitors fighting them – Orange which is backed by France Telecom and Telkom Kenya, YU which is backed by India’s ESSAR Group and Zain Kenya which is backed by Kuwait’s Zain Group (formerly MTC). Over the past year or so, All the four mobile networks announced deep tariff cuts in order to win as much market share as possible.  In Safaricom’s case, this resulted in a price cuts as deep as 40% so as to remain competitive.

In retrospect, a major impact of the tariff cuts is that Safaricom yesterday announced a drop of 23.3% in its pre-tax profits from a 2007 high of Kes. 19.9 billion to 2008 low of Kes. 15.3 billion. Tariff cuts are not the only reason for the major drop in profitability at Safaricom – the politically fueled post-election violence, high taxes, the global recession, fluctuating currencies, and lower average revenue per user (ARPU) all played a key role.

Safaricom’s declining fortunes inform the significant effort that its putting into growing the uptake for its other services, beyond voice. The operator has had to push data and other value added services like M-Pesa aggressively to make up for its lowered margins in voice. It also paid a hefty bill for its 3G license that enables it to offer mobile broadband services – a bold initiative that it has to justify as all its competitors are still offering the slower EDGE/GPRS services.

Going forward, what remains to be seen for the rest of 2009/10 is how well Safaricom will perform in the face of an increasingly challenging marketplace. The “go live” of high speed undersea cables like SEACOM in June 2009 will reduce its international communications costs considerably. It’s also in the process of fully integrating Onecom (the Internet Service Provider it acquired last year) to start offering Safaricom branded business internet services. So, in the face of all these initiatives, maybe, just maybe, the fairy tale isn’t over – at least not just yet.