Launching an Internet Café Chain in India: A Strategic Plan

Introduction

The purpose of this plan is to evaluate the creation of a series of Internet cafés throughout India, specifically concentrating on the cities of Bangalore, Chennai, and Hyderabad — all located in the southern regions of the country and all experiencing rapid growth as call center and outsourcing hubs. Both the influx of expatriates from Europe and North America to manage outsourcing and call center operations in these cities, and the increasing interest among Indian call center, outsourcing, and office workers in using personal e-mail and wireless devices for social networking, are driving exponential growth in demand for Internet access.

The business model of the proposed chain of Internet cafés looks to capitalize on a growing cultural shift away from an agrarian economy toward a more urban one. Young professionals in their twenties, working in these companies, are more connected than ever before digitally — to each other and to the outside world — yet many cannot afford the cost of home Internet access. Only 7% of the entire Indian population has Internet access at home due to the expense, and only one in ten has a personal computer of their own (The World Is Flat, 2005). As a result of these dynamics and the growing social acceptance of digital communication, the concept of a chain of Internet cafés is an attractive business opportunity.

Competitive Advantages of the Proposed Business

The typical Internet café is configured with between seven and ten computers, along with printers, scanners, and video conferencing equipment; website development expertise is available at larger metro locations. It is common to find in the larger metro cafés dedicated workspaces — referred to locally as "work cabins" — where Internet browsing privacy is assured. This privacy feature is one of the primary reasons students are drawn to Internet cafés for e-mail, instant messaging, and online gaming. Almost all of these facilities, especially in larger metro areas, are air-conditioned and provide both social networking and gaming areas.

The business model charges a per-hour rate for Internet access, with additional fees for value-added services including website development, e-commerce site creation for local small businesses, and wireless connectivity in the most densely populated areas of India's major cities. It is common for franchised Internet cafés to maintain alliances with national telephone and broadband providers.

Economic Factors Analysis

India's outsourcing industry — valued at $1.5 billion at the time of this writing — is the standout sector of the country's economy and illustrates how foreign investment, trade, and a more cooperative political climate can elevate industry performance within a nation otherwise struggling to sustain economic growth in its core sectors. India's major industries beyond outsourcing include agriculture, textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, and machinery manufacturing (CIA FactBook, 2007).

Along with IT and software, business-process outsourcing is the country's most open sector. In 2002, it attracted 15 percent of total foreign direct investment and accounted for 10 percent of all exports. By 2008, it was projected to attract one-third of all foreign direct investment and generate $60 billion a year in exports, creating nearly a million new jobs in the process. This growth, however, was already producing a skills shortage predicted to outpace the graduation rate of the country's educational institutions. As a result, companies outsourcing accounting, payroll, and other easily replicated processes were beginning to move to Malaysia, the Philippines, China, and other nations in the region, chasing available talent.

Without early investments by multinational companies, the outsourcing industry in India would likely never have emerged. Pioneers such as British Airways and GE were among the first to recognize the opportunity to relocate IT and other back-office operations to India. Their success demonstrated to the world that offshoring in India could deliver significant cost benefits (Di Lodovico, William, and Sanke, 2001). Beyond the immediate infusion of capital into the Indian market, these companies contributed to the growth of new domestic businesses through accelerated training programs.

As a result of foreign direct investment and capital inflows, India's economy more than doubled in real terms following the adoption of a more cooperative approach to managing joint ventures beginning in 1991 (Chakraborty & Basu, 2002). India's consumer demand, growing three to five times faster than the overall economy, was generating an aspiring middle class — young, wage-seeking, and exhibiting latent demand for Internet access. Seventy percent of India's citizens are under the age of 36, and the country is home to 20 percent of the world's population under 24. While the middle class was expanding rapidly, it remained important to recognize that one in four Indians — nearly 250 million of the country's 1.1 billion people — lived in poverty. The services and outsourcing sector accounted for just over half of GDP in 2004 while employing less than 30% of the workforce; the remaining two-thirds earned their living through agriculture, where growth was slow and wage prospects limited.

Advantages

The Indian government is heavily involved in economic development and planning. The ruling Congress Party at the time defined economic policies that directly affected Internet-related businesses undergoing rapid globalization, and was broadly pro-business in terms of welcoming foreign direct investment. To sustain rapid economic growth, the party recognized the need for several key policy changes:

Tariff reduction: Further reductions in tariff levels, targeting an average reduction of 10 percent, would bring India into parity with the Association of South East Asian Nations (ASEAN), its regional neighbors, and would stimulate investment in services businesses — including Internet access companies.

Relaxation of foreign-ownership restrictions: At the time, foreign ownership was prohibited altogether in industries such as agriculture, real estate, and retailing, and limited to minority stakes in many others, including banking, insurance, and telecommunications. These restrictions were expected to be largely lifted within three years.

More equitable labor laws: Software and business-outsourcing companies were already exempt from many labor regulations governing hours and overtime; extending similar flexibility to other sectors was seen as critical to sustaining the 40% cost advantage that made outsourcing viable. Manufacturing, by contrast, remained heavily regulated — a major impediment to India growing its manufacturing base at a pace comparable to China.

Demographic and adoption trends favoring cyber cafés: According to the Internet in India Report (2006), Internet users between the ages of 18 and 35 comprised the largest segment of all users nationally, accounting for 50% of total Internet usage across the country. While home access was growing, the most popular point of access remained the Internet café in metro cities, which served a valuable role in guiding first-time users. By 2006, Internet cafés had also evolved into social and gaming spaces. Research from the Internet & Mobile Association of India indicated that cafés would continue to be the dominant point of access for students, driven by convenience and privacy. Notably, 38% of Internet users reported averaging 8.2 hours per week online — a striking figure given the state of India's broader infrastructure.

Disadvantages

Unpredictable tariff policies: Fluctuating tariffs could impede the importation of networking equipment. As illustrated by the case of Schindler Elevator's entry into the Indian market (Columbus, 2005), erratic tariff changes can halt light manufacturing, assembly, and broader operations with little warning.

Lack of infrastructure investment incentives: Key elements of infrastructure — including electricity, telephone service, and Internet connectivity — were at times unreliable. India's infrastructure remained its most significant weakness, and the country would need to spend increasing proportions of its GNP to bring it to world-class standards.

Growth of instant messaging and convergence applications: The rise of instant messaging and peer-to-peer communication via cellular and PDA devices threatened to displace e-mail as the primary mode of digital communication in India over the following decade. According to the Internet in India Report (2006) and supporting research by Tekelec (2006) drawing on Ovum Consulting's forecasts, the Indian and Chinese markets were expected to dominate growth in these alternative communication technologies.

Government identification requirements: A crackdown by the Indian government requiring Internet café operators to record the identification of every user was causing a measurable decline in metro-area business. According to the Times of India (2006), operators in major cities faced significant pressure as a result of threatening e-mails traced to these locations, with heavy fines levied on shop owners. The government also suspected Internet cafés of being used by terrorists for communication. Cafés in rural areas, by contrast, continued to grow, as rural India had little in the way of home Internet access.

Conclusion

The creation of Internet cafés in India shows genuine potential, provided the plan includes expanding available services and increasing the value proposition for younger clientele. There are considerable risks associated with building cafés in a nation where cultural tensions over rapid westernization are already visible in its major cities. In addition, Internet cafés face government scrutiny as suspected venues for anti-government and terrorist communications, forcing operators to record the identification of every patron. Countering these threats, however, are the demographic and economic trends that strongly favor this type of service business — particularly as it grows in value over time through the addition of new services and partnership arrangements.

Works Cited

CIA FactBook (2007). CIA FactBook page on India. Retrieved July 27, 2007, from

Chakraborty, C., & Basu, P. (2002). Foreign direct investment and growth in India: A cointegration approach. Applied Economics, 34(9).

Columbus, L. (2005). Selling into India: Lessons learned from Silvio Napoli. CRM Buyer Magazine, April 22, 2005.

Di Lodovico, A., William, P., & Sanke, S. (2001). India — From emerging to surging. The McKinsey Quarterly, 2001 special edition: Emerging markets, pp. 28–50.

Farrell, D., Remes, J. K., & Schulz, H. (2004). The truth about foreign direct investment in emerging markets. The McKinsey Quarterly, 2004(1), pp. 24–35.

Internet & Mobile Association of India. (2006). Internet in India Report: Mapping the Indian Internet space (Summary Report of I-Cube 2006). Retrieved July 27, 2007, from

Tekelec. (2006). Next-generation messaging: Moving beyond legacy short message service centers (SMSCs) [White paper]. Retrieved July 27, 2007, from http://www.tekelec.com/rcenter/whitepapers/TKLCNGMessaing.pdf

Friedman, T. R. (2005). The world is flat. Farrar, Straus, and Giroux.

Times of India. (2006, November 2). Cafes headed for Cyberia? Delhi Times. Retrieved July 27, 2007, from http://timesofindia.indiatimes.com/articleshow/297520.cms