Internet Cafe industry

In 2004 Ramon Thomas gave a presentation on at the annual iWeek conference, The State of the Internet Cafe industry in South Africa. Since then we have continued to build, slowly but surely, the number of listings on our database of Internet cafe across the country. This had led to a new website Internet Cafe Directory, which is a comprehensive listening of cafe’s in Southern Africa. The next stage in this project will be to interview a selection of owners and users of these cafes.

In the mean time you can review the excellent paper by Jason Hobbs, a Contextual Enquiry into Internet Cafe’s in Johannesburg. And also download his photo essay of the Internet Cafes around Braamfontein, Johannesburg.

If you are doing research into setting up an Internet Cafe you want to explore the following resources:

• Download this sample Internet Cafe business plan
• Open Kiosk, an open source time management and kiosk system

Internet Café Industry Report

This report outlines the at a high level the state of the Internet Café market in South Africa with specific reference to Cape Town. The Internet Café industry is on a growth because new awareness being created by broadband availability and associated advertising on mainstream media platforms. The first broadband Internet product, Telkom’s ADSL, has become the most popular choice of connection used by Internet Cafés around the country. And the competition between Internet access providers are driving down the prices.

Wireless broadband provider, iBurst, recently announced the planned roll out of 20,000 Internet Café’s across the country by 2010. This does present and interesting opportunity to have a off the shelf product that can be implemented quickly with set costs already defined. It is outside the scope of this project to assess this offering. In March 2007 iBurst’s plans came to a grinding halt due to lack of funding.

In 2003 I started building a database of Internet Cafés in South Africa because there was no central repository of such information. This database is currently undergoing a major update. Some of the trends that has emerged is that about 60-70% of them use ADSL as their preferred method to connect to the Internet. The prices has been reduced three times since introduction and can be expected to come down even more.

The most popular use of Internet Café remains reading/writing emails, research, reading news websites, and gaming. There is a strong loyalty among the users of an Internet Café because after all, its the social interaction that draws them to this venue. Many of them offer additional services like cellphone/airtime, communications/postal services and sometimes selling of PC related products.

Cape Town in particular is primed for continued growth among tourists as we approach 2010. And they will seek out such venues to stay in touch with people from originating countries. Students are a prime target demographic because of restrictions on campus, and therefore need an outlet, elsewhere. VOIP technology will turn the Internet Café into another a cheaper option for national and international voice telephony, which can bring new users into the Café , and they can then be exposed to additional benefits.

This overview seeks to address the following key areas:

1. Current state of Internet Café market in South Africa
2. Highlights from a 2004 Internet Café owners survey
3. Assessment of Cape Town environment
4. Market Research Analysis
5. Recommendations

An Overview of the current State of Internet Cafe Industry

The Internet Café industry is an unregulated industry with no industry association. In the future this could be beneficial to seek representation or lobby the ISP industry or Government. The splintered nature is likely one of the key factors to inhibited growth so far. Two years it ago the number of Internet Cafés in Taiwan and South Korea was between 4000 and 6000. A news report from India claimed 50,000 while a Yahoo sponsored Internet Café project claimed 20,000 worldwide. The discrepancy is created by the different definitions of what a Café constitutes.

My definition is that an Internet Café derives the majority of its revenue from selling Internet-related services including the access time.

Arthur Goldstuck publishes an annual Internet Access report, which estimated 3.6 million Internet users by the end of 2005. This is only business, dial-up and academic users and excludes Internet Café users. My estimate for the total number of Internet Café users countrywide in the last 12 months is between 100,000 and 200,000 people. This still puts the total number of Internet users at below 4 million

I’ve estimated the number of Internet Cafés at 300 to 400 countrywide. There is some indications that there is particularly high demand from young people in townships. There is also a value chain at work. Goldstuck has also developed an experience curve of Internet usage. This means that people increase there usage and dependence on the Internet as they move from basic email, to surfing, to reading news, to using Internet banking and eventually shopping on-line One conclusion here is that more advanced and experienced users will spend more time On-line

Research from the Centre for Digital Future, University of Southern California, has shown that the Internet is becoming the preferred medium for news and entertainment among. And while time watching television is decreasing; time spent On-line is increase.

As VOIP became legal in February 2005, one of the biggest opportunities is for Internet Café to offer this form of cheaper voice calls for national and especially international calls. This should also have the side-effect of brining new users into the Internet Café that can be encouraged to experiment with other facets like email, surfing, etc.

There is some legal considerations that impact the Internet Café and detailed analysis is outside of the scope of this report. I will present some input in the 3rd phase of this project.

Highlights from a 2004 Survey Findings

In 2004 I conducted a small survey among 120 Internet Café owners and received 10 responses. The purpose of the survey was to understand the business models and the obstacles facing them as well as to gain insights into the financial aspects of the business. This section highlights the results of that small survey. It is not statistically valid but still proves very good baseline numbers for the questions asked.

The demographics were as follows:
4 in Cape Town, 4 Johannesburg, 1 East London, 1 Bloemfontein
50% were based in malls, 30% in standalone buildings, and remaining 20% were inside another building
50% ran purely as a Internet Café, 40% as Restaurant or Coffee Shop, 10% Lotto
The average years in existence had been 2.1 with the highest being 3 years and the lowest 1 year
The average daily number of visitors were 64 people, with Catwalk TV (Cape Town) attracting 300 visitors; the older the Internet Café the more visitors it tended to attract!
The average amount of gaming was 11% with one Internet Café in Alberton, Johannesburg deriving 80% of its users from Computer Gaming!
They attracted 40% foreigners – no distinction was made between foreigners living here or travelling her for a short period. This is a market segment that is ideal for building future loyalty because of repeat business and word-of-mouth.
Peak days tend to be Wednesday, Friday
Slow days tend to be Thursday and with two Cape Town Internet Café’s it was both Sat, Sunday
The single biggest obstacle highlighted by 60% of the sample was expensive bandwidth costs, and although it has dropped it has not been substantial. 40% claimed not enough visitors to their respective Cafés.
The number of new PC’s to be bought the following year was estimated at 30 (skewed higher because of Catwalk’s 240) – I do believe rental model is more appropriate.
While the average investment was around R 325,750 only 40% were profitable, 30% were breaking even and the remaining 30% making a loss.
Average income in 2004 was R 316,778 and the 2005 revenue was expected to be R749,556 which is a 136% increase year-on-year!
None-Internet income accounted for 17% of revenue
Monthly ISP (bandwidth) costs is substantial at R 14,748 and again skewed because of Catwalk’s substantially higher amount of computers
Average Telkom phone bill was R 1,871
And finally 70% of them used a software based time management system, 30% did it manually

Most Internet Café businesses bought the computers upfront, and has not realised its a fast depreciating asset, like a car. It is better to treat the PC hardware, as an ongoing cost, and replaces ownership with a rented computers. The big advantages is that the monthly rental fee will include hardware upgrades and maintenance! And removes the necessity of purchasing new computers every two years or less as new and better technology becomes availanble.

The Cape Town environment

The single biggest asset to the Cape Town environment is the large number of tourists. And this has fuelled growth of Internet Cafés in the Seapoint/Greenpoint areas over the last few years. The Yellowpages lists 22 Internet Cafés in the Cape Peninsula, while my database has 40 in that same location. This could easily be double that number with the majority being classified differently or just unknown at this time.

There is currently one Internet, Wash & Web, in the Rondebosch area. From the neighbouring suburbs the closest competition is one in Claremont and two in Wynberg. The hourly rates are respectively:
Wash & Web: R15 per hour
Java Internet, Claremont: R24 per hour with 28 computers
Vefa International, Wynberg: R20 per hour with 20 computers
Insomnia, Wynberg: info unavailable at this time

There are some Internet Cafés in Longmarket Street that I have used that charge as low a fee as R5 per hour. None of these Cafés are conducive to much social interaction. Its literally come in, do your thing, pay and leave. So a distinct advantage of Cyber will be this social interaction which will foster loyalty and repeat business.

The industry average is still high in my opinion, at R27 per hour, and the Cape Town average hourly rate is lower at R22. My recommendation is a price point between R20 and R25.

Market Research Analysis

Face to face interviews were conducted 24-27 October 2006. A 121 people were interviewed and the gender split was roughly 50/50. The following broad demographics applies to the sample:
46% were between 18-23 and 32% between 24-29
79% were students, 14% employed and 6% self-employed
46% live in Rondebosch, and the remained spread out over the Southern Suburbs

Preferences
66-68% prefer a Social, Relaxed atmosphere in their ideal bar
69% own a Nokia cellphone, while 17% own a Samsung
55% use Vodacom; 30% MTN and 16% Cell C – Virgin Mobile does not feature
65% own a PC, 6% a Mac, 11% a Laptop – only 14% does not own anything
70% access Internet from UCT Computer Lab; 44% from home – 7 people were planning to purchase PC in the next 12 months, and 3 more within three years time
Median cellphone bill is R287, 45% spend between R200-R300 per month
58% spend between 15-20 hours per week on a PC AND Internet; another 17% spend 20+ hours per week on-line; and 15% spend between 10-15 hours per week on-line Its interesting to note the PC usage and Internet usage is exactly the same amount per week.
51% are using a shared PC, which presents and opportunity to sell or build loyalty with Cyber when its in use by the other people
92% are NOT interested in training
88% use WindowsXP; while only 4% use Linux
The overwhelming majority of respondents use four or more services like web surfing, email, research and chatting – this is a very good sign about the heavy usage of computers and Internet that is now common practise among the target demographics
74% prefer open booth
41% do play PC or On-line Games
17% have used a Wifi Hotspot – demand will grow
50% use the Internet between 12-5pm; another 38% use it between 5pm-midnight

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