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Japan's Cybercaf?s Go Upmarket

Customers love the amenities, but the cost of providing DVDs, massage chairs, and refreshments hurts profits for mom-and-pop outfits

These ought to be difficult days for operators of Internet caf?s in Japan. After all, why would Japanese go to a cybercaf? when the widespread availability of broadband means most homes can have reliable, high-speed connections to the Net? With download speeds typically 10 times faster than in the U.S., Japanese surfers enjoy the fastest broadband connections in the world. And the Japanese increasingly don't need computers to go online. The first country in the world to offer 3G services back in 2001, Japan is today a leader in mobile Internet use.

Yet in Japan, of all places, new Net caf?s are springing up with remarkable regularity. According to the Japan Complex Caf? Assn., an industry group, the number of Net caf?s operated by its members is projected to reach 4,100 by 2010, up 50% from five year earlier. Revenue is also rising fast. The JCCA says member revenues will increase 50%, to $2.6 billion, by 2010. Throw in hundreds of mom-and-pop operators and the numbers would be even bigger. "This market will double in 10 years," says Seiichiro Samejima, an analyst at Ichiyoshi Securities in Tokyo.

Given Japan's standing as a broadband trailblazer, why are more people logging on at the country's cybercaf?s? History plays a part. Many Internet caf?s started life as manga caf?s??laces where comic book fans could pay by the hour to read and relax over a drink. Over the last decade, the line between Web caf??s and their manga counterparts has blurred, helping swell the number of customers.

A Massage With Your E-mail

But much of the credit for the surprising surge lies with some innovative thinking by caf?? operators. Fully aware that few customers nowadays need go to Internet caf??s to perform basic tasks such as checking e-mail or searching the Web, operators have been relentless in turning their caf??s into one-stop entertainment and relaxation shops.

These days that rarely means just a bunch of computers with Internet connections. On the contrary, almost anything goes, from massages to DVD rentals, from piping hot showers to snacks to manga libraries. "Before, a small space with a computer was good enough, but now our customers and their needs have changed," says Momoko Sugiura, a member of the investor relations team at Valic, a Yokohama-based operator of a hundred Net caf??s under the Kaikatsu Club brand. (Kaikatsu means "lively" in Japanese).

The raft of pampering and entertainments at Tokyo-based Aprecio's caf??s shows just how diverse these emporiums have become. Its branches supplement rows of PCs with massage chairs, shower rooms, and even bathing in germanium, a mineral that is believed to stimulate blood circulation. There are also 30,000-strong manga comic libraries, racks of magazines, and newly released DVDs to watch on the PCs or even in a small number of theater rooms complete with large flat-screen TVs.

A Godsend for Housewives and Seniors

When desired, privacy can be ensured with PCs housed in a private booth complete with a safe and intercom. And for hard-core gamers, there are extra-powerful computers that can take popular online games to a higher level. (Notably, some video game companies, including U.S. giant Electronic Arts (ERTS), have launched special versions of online games for Net caf??s).

Women and older customers are also boosting business for cybercaf??s. Today, 73% of Net caf?? customers are male, but the demographics are changing as the types of services on offer widen.

Inside Valic's Kaikatsu Clubs, d??cor and menus are all designed with a wider range of customers in firmly in mind. Many of the clubs are located in suburban districts, something that has helped attract housewives and the elderly. Inside, warm lighting helps create a congenial atmosphere; the design mimics Bali resort hotels. And last year Valic doubled the range of dishes to more than 40 and began using better quality ingredients. That's helped Valic increase its ratio of female customers to 36%. In all, Valic operates 100 caf??s and plans to add 20 more per year, each serving 30,000 customers a year.

It also helps that the prices are reasonable. According to the JCCA, customers stay an average of 2.5 hours, spending just $10 each. Mariko Yumita, an office worker in her 30s from Omiya near Tokyo, is one convert. She became a member at her local 115-booth Reche Rcher, a small chain of Web caf??s, in July. Although she has a PC at the home that she shares with her parents, her room, like many in Japan, is small. Worse, it becomes unbearably hot during the summer months.

A Haven for the Homeless?

Now Yumita spends about three hours each weekend at the caf??, where she usually watches a DVD on a PC before checking her e-mail and reading about astrology online. "At first I was a bit nervous because you don't know what sort of people would go but the inside of the caf?? is nice and the female receptionists are friendly, which makes it easier for a woman to go," she says.

Value for money, she adds, isn't in doubt. At Reche Rcher, $17 buys up to six hours of surfing time. Soft drinks are free, while there are well-stocked magazine and comic libraries and segregated shower rooms (toiletries and towels provided) if she tires of surfing the Net.

Indeed, such is the value on offer that those too poor to rent apartments are turning Net caf??s into temporary homes. On Aug. 28, Japan's Ministry of Health, Labor & Welfare published results of a survey that showed Japan has around 5,400 "Net caf?? refugees" living in cybercaf??s. The JCCA, concerned that Net caf??s' newfound upscale image would suffer, pleaded in a statement for people not to use the "discriminatory" term. "These are our precious customers. Negative coverage puts off others from coming to the caf??s," it wrote.

Investments Drag Down Profitability

That might appear to be an overreaction, but how to project a respectable image is a real concern. Critics complain cybercaf??s are a hotbed for online fraud and other crimes such as the illegal copying of DVDs. But when caf??s instigate strict membership schemes they invariably lose customers.

Profitability is also a problem, particularly for many mom-and-pop operators that must invest in new services or risk losing customers. And even those that do invest heavily aren't always successful. "There's a lot of trial and error," admits Valic's Sugiura. Sales at her company, which is listed on the Jasdaq small-companies market, rose 34%, to $151 million last year. Net earnings rose 4%, to $3.9 million.

In the medium term, analysts expect many of the smaller players to be left behind and replaced by companies like Valic, which also have the valuable experience of operating karaoke rooms, another Japanese pastime that includes paying by the hour to rent out a small space. "We're going to see a shakeout," says Ichiyoshi's Samejima.

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