Biz Opportunity: Rolling Up and Franchising China’s Internet Cafes

October 11th, 2007

In my previous post, I talked about the dark side of China’s Internet cafes. I was surprised at how quickly I got responses to the posting; there were more than six comments in less than two hours.

Now, I would like to talk about a business opportunity in China’s Internet cafes. One of the biggest problems with Internet cafes is the uneven quality of the management; most are terribly managed, some are managed pretty well. Overall, the well-managed cafes suffer from the poor image problem associated with the whole industry. In a comment following my post, Fons Tuinstra says that the numbers of people going to Internet cafes are falling sharply, citing CNNIC figures. I suspect that this is because of a combination of factors:

  • Educated Chinese families don’t like them because of their bad reputation
  • With laptop computer prices coming down to 7,000-8,000 yuan for a fully equipped notebook, prices are coming with the range of most urban Chinese
  • With monthly DSL prices between 100-200 yuan; broadband access is now affordable

In spite of all this, the Internet cafe still has attraction as a social and recreation area for young people who are looking for places to meet which don’t cost too much.

So why hasn’t someone come in with a roll-up strategy, buying up the good Internet cafes, offering professional management and a franchise package, and turning the whole thing into a franchise like Starbucks, McDonald’s or KFC? After all, that is how Ray Kroc started with McDonald’s in the 50s in the US.

These Internet cafes should offer clean well-lit areas which are frequently cleaned, fresh food and drink, clean bathrooms and a good overall experience. Just think of what could be done if a Chinese Internet cafe experience could be as good as an Apple store! Yes, prices would be higher but it would attract a much better demographic group. And a better demographic would make for a better advertising market.

Events could be planned for the stores educating people about online buying and selling, and to demo new products and services. Game contests could be held in a much better environment than are available now.

If I were an advertiser, I would really love to reach this demographic group. They would be upwardly mobile, not like the permanent urban underclass we now see in so many Internet cafes.

In short, make the Internet cafe a place where Chinese parents would not be ashamed of letting their child go to, and a place where the child could tell his parents he is at, without having to lie or admit to shamefully.

This would help to clean up the image of an industry which badly needs to improve its image. It would even make sense for an advertising company to get into it, as the advertising opportunities in a wholesome Internet cafe franchise are huge. I can think of several companies which should seriously consider doing an Internet cafe franchise in China:

And now, here’s the company I’d really like to see do a Internet cafe franchise in China because it really knows about making cool stuff and it understands lifestyle marketing. If they did it, and did it right, they would own the Chinese Internet cafe experience.

Now wouldn’t that be something! You saw it here first.

I can always wish…

In Business, Becoming Fearless Is What Makes You Great

October 7th, 2007

For most of my career, I have been looking for patterns to discover why some companies come out of nowhere and become big and great, and why others who have dominated the market lose market share and users to the newcomers. More often than not, the newcomers are entrepreneurs who had a vision, while the established companies were as Lou Gerstner called it in his book, “Who Says Elephants Can’d Dance?”

I have looked at startups and established companies, and if there is one word which separates the hungry newcomers from the established, shall I say it, dinosaurs, it is fear. It is not so much the emotion, but how they react to the possibility of failure. More than anything else, this strikes at the heart of what differentiates the entrepreneur from the established firms which frequently end up belonging to another age, and usually end up being swept into the dustbin of history.

Most successful Internet companies, whether they are Yahoo! or Google in the US, and Shanda, Baidu, Alibaba or Tencent in China have one common theme in their histories. At some low point in their early years, their founder/s almost gave up, and they almost sold their companies at a low price to another company. When this happened, the founder/s would seriously consider their options. Sometimes they would lay off people, cut down their costs, maybe fight with their spouses who wanted them to quit and work for IBM or Microsoft or somehow throw in the towel and give up, or sell out. Then, when things were at their lowest point, their user numbers would go up, or they would secure funding and they would turn the corner and start to grow dramatically.

It is all about fear, and overcoming fear. When you have reached a low point, there is no more fear.

“What is the worse thing that can happen to you?”

That you will lose your house? Your car? Your spouse and family? That you will die and be forgotten? Are you willing to take these risks?

When you have reached that point, there is nothing more to fear. It’s all about willingness to sacrifice today in the belief that you will succeed tomorrow. What is there to lose? Money? That has already been invested. Quitting would only be a recognition of the loss; most entrepreneurs refuse to recognize the loss. This is what makes entrepreneurs special; the best ones are truly fearless.

On an individual basis, this is called a near-death experience. If you are not sure what I mean, watch the movie Fearless (1993).

And it’s not about money. They know that money buys the trappings of success such as a big house and trophy wife or mistresses, but that they are just trappings of success. After they become successful, they frequently look back on their “good old days”. And what are their good old days? When they didn’t know whether they would make the month’s payroll, or were living in their car, or eating instant noodles because they could not afford anything better.

This is not something which can be taught in business school. And this is why the US was, and now China is, a great place for entrepreneurs. It’s easy when you are starting from zero. More than any other markets, American business investors believe in the value and experience of failure; this is where Japan and Europe cannot compete with the US and China.

And this is why is it so difficult for large companies to make the leap or cross the chasm. The only way for a successful marketmaker to bridge the gap is to give up all its revenue, all its investments and to start over again.

That has not happened yet. Microsoft has tried to do it, but they cannot sacrifice revenue; their investors won’t let them. Yahoo! was a great Web 1.0 company with great assets but has had significant challenges reinventing itself from the glory days when banner ads were king. When companies become successful, they attract people who wish to avoid risk and who want to make money to buy their big homes, drive big cars and to have their status. They are risk avoiders, not risk takers. Once a company starts to attract this kind of person, it cannot re-invent itself.

It fears failure and won’t take risks.

Entrepreneurialism is all about finding success or failure relatively quickly by putting everything on the line. What the Internet has done in the US and now in China is it has sped up the failure and success cycle, collapsing the amount of time it takes to discover what works.

In my articles I am frequently critical of large businesses which cannot adapt to new changed situations; this is because they are afraid of fear and failure. They want to be market dominators at a time when the market is changing beneath their feet. They have meetings and talk and grumble and analyze, but most of the time they are not able to do much. They acquire small companies to maintain growth, and more often than not, they destroy the spark which made those startups successful in the first place. Or the smart people who have entrepreneurial talent and are willing to take the risks see market opportunities and become entrepreneurs in their own startups themselves.

That is why successful change always comes from the bottom, not from the top. And that is why the cycle of change will continue, only faster.

UPDATE: Frank Yu pointed me to this article by the consistently good Paul Graham who says a lot of the same things.