* Blames network outages on sabotage
* To launch 3G network in first half of 2011
By David Clarke and Duncan Miriri
NAIROBI, Oct 8 (Reuters) - The price war being waged by Kenyan telecoms operators is not sustainable and firms will be forced to cut costs and restructure at some point if revenue per user slides, the head of Telkom Kenya said in an interview. Kenya's telecoms regulator slashed mobile interconnection charges in August and Zain, the second largest mobile operator owned by India's Bharti Airtel (BRTI.BO), sparked the price war in east Africa's biggest economy by halving its call tariffs.
Since then Kenya's biggest operator, Safaricom (SCOM.NR), has followed suit and smaller players such as Telkom Kenya, which is controlled by France Telecom's FTE.PA Orange, and Yu have been forced to make drastic price cuts.
"This strategy is not a viable strategy, it's not sustainable. But it seems no one cares, except operators like us who are trying to protect Kenyan jobs and the investments we've made here," Telkom Kenya Chief Executive Mickael Ghossein told Reuters in an interview.
"Unfortunately, if it continues like that there will have to be cost cuts, restructuring and a focus on niches and differentiation. It's a way to survive."
Communications Ministry Permanent Secretary Bitange Ndemo told Reuters last month the mobile war had come too soon and did not make business sense as prices should have fallen only when firms were earning more from broadband services. [ID:nLDE688077]
Shares in Safaricom, which is 40 percent owned by Vodafone (VOD.L), have slumped from a closing year high of 6 shillings on Aug. 3 to as low as 4.3 shillings on Sept. 28.
"To cover our costs today, we should have four times our subscriber base, or four times traffic. And no one has this traffic," he said. "Ask a Kenyan: Are you using your phone more?" Ghossein said.
"How will the revenue be maintained? Maybe by magic?"
Ghossein said firms were hoping broadband and other data services would compensate for lower mobile revenues but he predicted there would be a price war in that sector too.
Telkom Kenya has struggled to eat into Safaricom's dominant position in the mobile market. Orange has about 1.2 million subscribers while Safaricom has 80 percent of the market.
Ghossein said Orange had invested heavily in Internet services delivered down copper and fibre cables, but had put spending on hold because of persistent vandalism of its network -- the only fixed-cable network throughout Kenya.
"It's sabotage. Ninety percent is sabotage," he said.
Ghossein said he had an idea who was behind the sabotage but could not say anything because he had no proof. The chief executive said he had seen a report detailing what had been going on but had not been able to keep a copy of it. He did not say who had written the report.
"For now we have blocked everything, as we wait for the government to change vandalism -- people who cut cables -- from a routine 10,000 shilling buyout to one where you go to prison. Because it's an economic crime," he said.
He said that in the absence of any change, Orange would focus on high-end retail broadband customers in neighbourhoods were the company could protect its network, while developing its existing internet services for corporate clients.
The company is also planning to launch a third-generation mobile network to compete with Safaricom, the only operator providing 3G services now, and a mobile money transfer service.
Ghossein said the 3G network was ready in Nairobi and would be launched in the first half of 2011, but with far higher speeds than those available from Safaricom. He said the money transfer service would be launched this year.
"We have a good competitor. Safaricom is a good competitor and Kenyan customers are demanding," he said.
"When you come to the market, you have to be very good ... You have to take the highest speed, not one with 7 megabytes. You have to go to 21, to 42." (Editing by Karen Foster)
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