Opening an Internet Cafe in Term Paper

Excerpt from Term Paper :

The net result is a growing digital divide in the secondary and tertiary cities of India, overlooked for Internet access, making the prospect of creating an Internet cafe in secondary, and often less expensive cities, more difficult.

The ADSL launch across India has been abnormally slow, and cable modem access is concentrated in the most wired cities and regions of the world, yet paradoxically there has not been a reduction in pricing of services due to government regulations. The nation-wide roll-out of ADSL throughout the most wired and affluent regions of India has been abnormally slow, hampered by the lack of infrastructure needed to complete the last mile cabling and integration across legacy telecommunications networks. This has led to a high growth rate in broadband adoption, specifically in the area of cable modem access, with 69% of all of India's cable access customers being in the Global High Income segment. This figure is calculated from Table 1, where the total number of Cable Subscribers was divided by the number from the Global high income segment to find the 69% figure. Further on, 21% of the cable access customers in the Global Middle Income segment. This translates into a disadvantage for creating an Internet cafe business because the penetration of cable access into the most affluent segment in India is being driven by both the demand for Internet access in this highest income segment and the preponderance of PCs already being owned by members of the Global High Income segment.

Starting in the first part of 2006 there have been taxes and duties in the Indian telecommunicates sector that are among the highest and most prohibitive to FDI in the world. Taxes in India on telecommunications sector on new revenues are hovering around 35%, as compared to 2.5% in many other Asian nations. Despite the influx of FDI ready to wire the entire nation, this tariff issue is slowing down development of the telecommunications sector as a result, which in turn is continuing to make the digital divide grow deeper over time.


As the purpose of this paper is to evaluate the potential of opening an Internet cafe, which is envisioned to be a retail establishment offering Internet access services, the retail sector of India is used as the basis of this resources discussion. With more than 5 million outlets, the Indian retail sector is marked by its unorganized, largely underdeveloped, and unorganized structure. Of these 5 million outlets, it is estimated that nearly 300,000 of them are Internet cafes (Glaser, 2003). Of these, the majorities are clustered in the larger cities, yet it is common to find at least four or five Internet Cafes even in villages (Glaser, 2003). This sector of the Indian economy is dominated by small, family-owned firms. Modern retail chains, most of which have established themselves in the past five years, account for just 2% of retail sales, compared with 65% in the United States, 40% in Thailand and 10% in China.

As a result of this fragmentation, there is significant growth in the retail sector possible. At Kearney (2006) defines India as the most attractive retail environment in the world in their Global Retail Development Index published yearly by the consultancy. The index ranks global economies on four factors, which include Country Risk, Market attractiveness, Market Saturation, and Time Pressure. While at Kearney sees moderate risk and a relatively high level of costs associated with being in compliance to government regulations, India is consistently one of the top ranked countries due to the low market saturation in the retail sector.

Despite the high level of market opportunity consultancies and industry experts see in the retail sector in India, specifically around services, the inflexible labor laws and often high and unpredictable supply chain costs and performance, the preference for in-country retailers by the majority of lower income segments (Kumar, 2004), all these factors have led to a muted growth of the retail sector in India. Labor laws specifically state that employees must be given full benefits in the event they are let go is quite expensive. The difficulty of foreign retailers and service providers getting a foothold in the market is well-known, and since 2005 there has been much discussion about permitting foreign investment in the retail sector. In early 2006 the government allowed up to 51% FDI in single-brand retailing (such FDI could previously take place only through the franchisee route), but shied away from a comprehensive opening up of the retail sector to foreign competition.


A highly balkanized retail marketplace makes market entry easily accomplished. Given the highly fragmented nature of the retailing marketplace, there is the potential for any new business to quickly move into a specific niche product or service area and quickly deliver significant value through differentiated offerings.

Higher levels of FDI ownership will boost services to assist entrepreneurs in getting their own retail and services chains opened. The growth of telecommunication infrastructure, the majority of which is being funded by companies competing to dominate the Indian market, will eventually lead to more global partnerships. This will serve to strengthen the potential of an Internet Cafe offering additional services.


Low cost of starting an Internet Cafe in a tertiary or secondary city may be at the expense of having a customer base from the Global Middle Income segment. Clearly from the research to complete this analysis the costs associated with starting up an Internet Cafe in secondary cities of the nation are much lower than in the larger, better supported cities who are receiving excellent service from the telecommunications providers. The implications for starting an Internet Cafe under these circumstances forces the question of whether to immediately launch into the larger, more prosperous region or launch into a tertiary market and learn how the company can penetrate the Indian market for Internet cafes in the country.

The risks of hiring the wrong employees are quite high, and as a result, the costs could get out of control of the Internet cafe begins cycling through employees. As in any small business, there will be turnover of employees in the Internet cafes' operations, and occasionally the need to let someone go who may not work out with the philosophies of the business. The Indian government has created a series of mandates for employees who are let go for any reason, and the costs can be significant, (World Bank, 2004). The implications for starting a new business in India and hiring employees are financially significant. The need for thoroughly reviewing candidates and hiring only the best is imperative.

Regulations and Procedures

It is common knowledge in India (Glaser, 2003) that Internet cafes are the most highly regulated industries in the retail and services sector. There are more than 13 different permissions that Internet cafe owners need to gain in order to open their first cafe, and there are escalating costs of government compliance and monitoring. These increased costs of compliance are forcing a shake-out of the Internet cafe industry today as only the largest chains can afford to pay for consultancies and reporting to be in compliance to government regulations. Additional regulations dictated from the Indian governments since September 2000, include 100% Foreign Direct Investment (FDI) in Internet service providers (ISPs) not providing gateways, in infrastructure providers of dark fiber, and in e-mail and voice mail.

In May, 2001 the government allowed up to 74% FDI in ISPs setting up international gateways, paging and end-to-end bandwidth, though only investments up to 49% are allowed automatically. In November 2005 the government raised the FDI cap on basic, cellular and value-added telecommunications services and for global mobile personal satellite communications from 49% to 74%, though only investments up to 49% are allowed on the automatic route. The 74% includes shares held by foreign institutional investors, non-resident Indians, depositary receipts (ADRs and GDRs), foreign-currency convertible bonds and convertible preference shares. Foreign investment in holding companies also counts when calculating the foreign-investment limit. Companies must disclose the holding pattern half-yearly and certify that foreign investment is within the 74% cap. The combination of Internet cafe-specific requirements and FDI requirements are creating a highly regulated and costly environment for smaller, more independent cafes in India. Chains and those cafes owned by larger companies have the financial scalability to manage these constraints and regulations yet the smaller ones do not.


Given the high level of regulations for establishing and running an Internet cafe, only the most knowledgeable in Indian laws will survive long-term. This is a potential advantage for any small business owner who chooses to look at the many compliance requirements to differentiate themselves through more efficient management of their business to the expectations of the Indian government. The need for compliance, even to the level of which websites can be viewed from the PCs in the cafe, is also being regulated from the government (World Bank, 2004).

Foreign Direct Investment (FDI) is…

Sources Used in Document:


AT Kearney (2006) -- Global Retail Development Index (GRDI). Emerging Market Priorities for Global Retailers. Accessed from the Internet on April 22, 2007 from location:

Economist (2005) - "India: Business Environment at a Glance," Economist Intelligence Unit (18 April 2005).

Icon Group International (2000) - "Marketing and Distribution in India," Executive Report on Strategies in India (2000).

Glaser (2003) - Indian Cities on Verge of Restricting Access to Cyber Cafes. USC Annenberg Online Journalism Review. April 12, 2003. Accessed on April 22, 2007 from location:

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