Opening an Internet Café in India: Market, Risk & Regulation

Introduction

The Internet's impact on the everyday lives of hundreds of millions of people globally has created entirely new business models regarding how people communicate with one another, research areas of personal and professional interest, and ultimately increase their opportunities to learn. The greater the need to connect with others globally and to learn, the greater the demand for online access services. The many factors that must be taken into account before opening an Internet service café in India are the subject of this paper. Specifically focusing on market size, resources, regulations, and risk, this paper discusses the advantages and disadvantages of each factor. These are evaluated in the context of creating a new venture whose strategic objective is the delivery of Internet access to the millions of Indian residents who are increasingly relying on the Internet as a communication and learning medium.

India's economic growth was projected to surpass Japan by 2010 and become the world's third largest economic force, sending a clear message to multinational firms that the Indian economy deserves serious consideration in any global expansion plan. Economic reforms introduced in 1991 relaxed restrictions on foreign direct investment and greatly contributed to India's 8% annual economic growth rate in every year since 2002. This unprecedented growth continued unabated despite growing opposition from nationalist groups. The growing pressure from domestic and foreign investors has continued to stimulate economic reforms, opening previously closed industry sectors and increasing foreign ownership limits across many industries.

Country Overview and Economic Context

The sweeping reforms of 2005 are credited by some members of the Indian government with increasing foreign direct investment in the retail, domestic aviation, and radio industries, leading to the robust GNP and GDP growth the country experienced from 2002 onward. As a result of these reforms, foreign firms became able to increase their Indian investments from 40% to a controlling 51% in most industries (Economist, 2005). India is also the world's largest democracy with a population of one billion or more individuals. As a result of the increasing liberalization of growth policies and the sheer size of this market, more multinationals have been looking at India as part of their strategic growth plans (Icon Group International, 2000).

Because India's broader communications and telecommunications infrastructure has limited coverage across the entire nation, the Indian Internet access market has continued to post strong growth rates over the past seven years. This growth has been propelled by both the country's rapidly expanding population and the influx of economic growth from Foreign Direct Investment (FDI) and the resulting economic progression. All of these factors have created the financial incentives and funds for expanding and improving India's telecommunications network.

The Indian online population has grown significantly as a result. The Indian Internet access market generated total revenues of $2.6 billion in 2005, an increase of 40.4% over 2004, representing a compound annual growth rate (CAGR) of 36.5% for the five-year period spanning 2001–2005. The Chinese market grew with a CAGR of 29.7% for the same period, and the more mature South Korean market exhibited a 13.5% CAGR. The number of Internet users in India also grew dramatically, with a CAGR of 64.2% leading to 50.4 million users in 2005. To put this into context, approximately one in twenty of India's population had Internet access at that time, compared with closer to one in two in Western Europe.

It is anticipated that market growth will slow in relative terms while still showing significant growth by any global standard of comparison. A CAGR of 18.3% for the five-year period 2005–2010 was expected to drive the market to a value of $6.1 billion by the end of 2010. The number of Internet users was set to increase with an anticipated CAGR of 23.2% for the same period, expected to drive the market to a total of 142.9 million users by the end of 2010. At the time of analysis, the market for Internet access was primarily composed of the nation's affluent segment, yet it was expected that the middle class would increasingly spend to gain Internet access in their homes and in Internet cafés. The table below provides an analysis of Indian media usage by income class, showing the heavy concentration of Internet users in the global high-income segment.

Market Size: Advantages and Disadvantages

Table 1: Analysis of Indian Media Usage by Income Class

India: 60 daily newspapers per 1,000 people; 83 radios; 39 television sets; 7 cable subscribers; 17 personal computers; 57.4 Internet users. Global Low Income: 44 newspapers; 84 radios; 27 television sets; 7 cable subscribers; 16 personal computers; 13.3 Internet users. Global High Income: 1,000 daily newspapers per 1,000 people; 95.4 Internet users per 1,000 people. Source: World Bank (2004)

Each specific income segment has been defined as shown below. The top 8 million consumers in India earn in excess of $20,000 a year, and background research also shows that this group has the highest propensity to use the Internet for business and personal buying, communication, training, and transactions — fulfilling many of the predictions made by Thomas Friedman in The World Is Flat (2005).

Table 2: Distribution of Income in India

Global Low Income: Less than $5,000/year. Global Middle Income: $5,000 to $20,000/year. Global High Income: 8 million people earning more than $20,000/year. Source: Kumar (2004)

India has one of the highest-growth Internet user populations in the world, driven by FDI and a more liberal approach to the privatization of industries. These factors are contributing to a rapid growth in the number of Internet users. A CAGR of 18.3% for 2005–2010 was forecast to drive the market to $6.1 billion by the end of 2010. Economic growth driven by FDI is making Internet access increasingly important to both the Global High Income and Global Middle Income groups.

Seventy-four percent of India's Internet users are from the Global High Income segment, and 22% are from the Global Middle Income segment. This is excellent news for anyone looking to provide Internet services in India, especially if the company is from another nation. Kumar (2004) found that the highest-income segment of the Indian population has a high willingness to purchase products and services from global suppliers, in marked contrast to the largest and poorest income segments, which have a marked distrust of foreign brands. In the context of creating an Internet access provider business, the highest-income Indians will find this a useful service, and an aspirational approach to consumption is likely to permeate the Global Middle Income segment over time.

The Global High Income segment dominates personal computer ownership in the country, with an estimated 90% of all systems owned by this segment. While infrastructure is not yet in place to allow all members of this segment to access the Internet from their homes, many who live in more industrialized cities — including New Delhi, Bangalore, and Hyderabad — are already accessing the Internet from home. The fact that nine out of every ten PCs in the country are owned by the wealthiest citizens is an advantage for creating an Internet café, as these users will quickly learn the fundamentals of using their systems and look for opportunities to connect with the broader world.

Country-wide, there is still a lack of consistent telecommunications infrastructure, which makes the task of creating an Internet café difficult in more remote cities and villages. The Indian government has not had to make significant investments in telecommunications infrastructure, as companies such as Bharti Tele-Ventures, Sify, VSNL, Reliance, MTNL, and BSNL are all competing to gain the majority of market share in Internet access. While this is welcomed by the government, it is concentrating cost and price competition in ways that create a growing digital divide in secondary and tertiary cities, making the prospect of opening an Internet café in those less expensive locations more difficult.

The ADSL rollout across India has been abnormally slow, and cable modem access is concentrated in the most-wired cities and regions. Paradoxically, there has been no corresponding reduction in pricing due to government regulations. The nationwide rollout of ADSL throughout the most affluent regions has been hampered by the lack of infrastructure needed to complete the last-mile cabling and integration across legacy telecommunications networks. This has led to high growth in broadband adoption — specifically cable modem access — with 69% of all cable access customers in the Global High Income segment and 21% in the Global Middle Income segment. This penetration pattern is a disadvantage for an Internet café business, since the most affluent customers are increasingly acquiring home broadband and may rely less on public access points.

Conclusion

Political insurgency is a critical concern, particularly for westernized businesses. As the Maoist example illustrates, political insurgency is active in the country. While attacks on westernized businesses in southern cities have been limited, the New Delhi train bombing — for which Pakistani insurgents claimed responsibility — has caused security concerns to escalate significantly.

There is also the potential for rupee fluctuation driven by tariff and trade disputes with the European Union (EU). Ongoing trade disagreements between EU member countries and India could escalate into a trade war if tariffs continue to rise on both sides. The implications for an Internet café would include higher costs for importing hardware needed to run the business and higher operational costs if specific products or services from the EU are required.

Given the comprehensive research completed for this analysis — covering cultural, economic, political, and legal dimensions alongside market size, resources, regulations, and risks — the decision is made not to launch this Internet café business in India at the present time. The Indian market is one of the least saturated markets in many industries, Internet access being one of them. The growth rate of Internet users is among the highest in the world, as is the growth of the Internet café concept — known in India as the "cyber café." Add to these advantages the growth in FDI and the exponential growth of the services sector, and from an initial analysis the market appears excellent for an Internet café.

Yet when the infrastructure is considered alongside the sporadic and often poor service that the majority of Internet cafés in India deliver as a result, it becomes clear that only a large, well-financed services organization capable of securing the highest-speed broadband connections in its areas of operation will succeed. Smaller, single-site locations will be at the mercy of the larger Internet service providers (ISPs), many of which are also moving into the Internet café market. A small single-location or even multi-location Internet café will continually need to pay higher rates to achieve the same level of service that ISP-developed cafés serving entire regions or the nation are able to deliver.

Finally, the many regulations and procedures are making it very difficult for existing Internet cafés to turn a profit while staying in compliance with increasingly heavy government requirements. When all of these factors are taken into account, it is clear that setting up an Internet café in India is a high-risk strategy without a clearly solid growth future, given the twin limitations of ISPs becoming direct competitors and increasingly complicated regulatory compliance demands.