Detailed analysis of various business sectors in Uganda

Another Internet/cyber cafe, really?

Outside Looking In
D E Wasake [With guest writer]

About my guest writer:

Simon Nkuyahaga is currently the CEO at HGZ Technologies a global Information Technology company which provides technology solutions to over 500 customers world wide. Previously he worked at Warid Telecom. In addition he was Head MSO Uganda at Sitronics Telecom Solutions. He was also a Tutor for "Systems Administration and Systems Security" at Makerere University's faculty of computing and Information technology. He studied at the University of Liverpool as well as at Makerere University.

About the writer:

For over 8 years I have worked with several clients in Uganda, The Bahamas and the United Kingdom in providing audit, tax, accounting and advisory services. My sector experience with clients in various sectors including IT related services enables me have good understanding of this sector. To see the full depth of my experience, Please see my profile

Article summary

Despite the "internet cafe" bubble having burst in Uganda (i.e it is no longer as lucrative as initially) there is still demand for internet cafes as internet usage in Uganda at 10% is still low and so Ugandans still access internet at cafes. This business is potentially loss making unless you diversify your services heavily. The estimated profitability from this sector following our "advanced thinking" tips is Shs. 2m per year from an initial investment of Shs. 16m. It therefore takes you about 7 years to get your capital back (return on investment).

Our "Advanced thinking" tips to reduce this period include providing providing other services like "WIFI" hot spots around the cafe and combining this model with affiliated businesses like a Voice Over Internet Protocal (VOIP) call shop concept.

30 minutes to type one email!

The sign outside boldly states "Shs 500 for 30 minutes, Shs 1,000 for 1 hour (with bonus 20 minutes". Its much cheaper than the internet cafe two doors down. Woohoo. You enter, the bored looking lady tells you to go the workstation named "Nehemiah" as "Obediah" and "Zechariah" are not working. You sign in, and it takes 10 minutes to load yahoo!

In the one hour that you are there you manage to only type one email…actually not really…you only forward a joke about a "Minister of Fortfolio" because if you put your flash disk in and dare to attach a PDF document, you will spend another 30 minutes there. The bulk of internet cafes in Uganda are really really I mean snail REALLy slow but that aside, are these worth setting up? I set out my observations below.

First, the CONS (of course)

1. Internet stability vs value for money

Internet in Uganda can be very unreliable and where it is reliable it is generally more expensive. The reason being that generally the wired connections using ADSL and fibre optic for example are more reliable but cost more while the cheaper products using wireless connections are usually not as reliable for example VSAT and WiMax type of connections are affected by weather.

My best advice would therefore be to stick to good old wired cables like ADSL and of my assessment of the various ISPs(see below), UTL does a good job here, with a great value and generally reliable product if you can get the telephone line. Alternatively Infocom is a good option.

In terms of what bandwidth to sign up for, as a guide, an internet connection of say 128kbps can comfortably support 4 computers running simultaneously.

In terms of charges, I set out in order of preference(based on monthly charge, reliability of connection plus installation) various ISPS and their relative monthly internet prices as well as equipment/installation charges.

  • UTL charges UGX 200,000 a month for 512kbps shared broadband using ADSL; Installation/equipment costs of about Shs 700,000.(Informaton as at early 2010)
  • Infocom charge $85 per month for 128kbps dedicated bandwidth using fibre optic.Installation of equipment is $590 (as at early 2010)
  • Warid charges $200 a month for 128kbps dedicated broadband using WiMax. Installation/equipment is about $531 (information as at early 2010).
  • Datanet charge $400 (exclusive of VAT) for 96/128 kbps for dedicated bandwidth on VSAT. Installation is about $850 ( information as at early 2010)
  • Orange use "microwave" equipment and MRC bandwidth of $256kbps dedicated broadband costs $272. Equipment monthly rental charge is $250 and equipment installation is $1,000. Alternatively purchase of equipment is $3,500 (As at mid 2010)
  • The Broadband company (tel: +256414236209) charge about Shs 180,000 for 128kbps dedicated broadband. Installation of equipment is about Shs 166,000 (early 2010).

P.S I rank Broadband company at the bottom as their monthly or installation costs are entirely inconsistent with other market players and this is often not necessarily a good sign without reasonable cause.

2. Competition in the sector

It is not uncommon to find several internet cafes in one building and as such this can greatly reduce the potential profit for a cafe but this in itself reflects the fact that several people cannot afford internet in their homes and thus will always need internet.

A cafe with reliable internet however will easily over come this hurdle. The trend therefore I expect is that with increased competition, cafe branch networks like kayenet will develop brand recognition and customers moving say from one suburub to another will find it easier to stick to a tried and tested brand. P.S I have not used Kayenet and so cannot attest to their reliability. I just used it as an example.

3. The continued growth of home internet users and mobile internet

For mainly Kampala's young professional and middle class, there has been a recent proliferation of "home user" internet being promoted by telecom companies and this is defintely pausing a threat to the number of internet cafe users.

For example Orange home internet package which comprises of a modem(like a memory stick) costs shs. 99,000 and the fairly sizeable gold 3GB pack costs Shs85,000. This is especially convenient as its "plug and play" i.e the user can carry their modem to say office, home, the village and still access internet, this therefore contrasts with the inconvenience of going to the internet cafe (for example when you want to go to those XX rated sites 😉

Further more, increased use of smart phones like the Iphone combined with the telecom providers giving some good mobile internet deals, it is expected that use of the internet cafe will decline slightly. Of course this is not a major threat to date as these smart phones are expensive and out of reach of many internet users like the youth who I can expect will continue to use internet cafes

4. Start up costs

I estimate it costs about Shs 16m to start this business. This comprises of about Shs 11.6m in equipment and the balance in other costs. My estimates are below:

Equipment

  • 4 computer systems (acer duo processor, dell monitor, key board,mouse): shs 4,460,000
  • 1 Server(dell vostro): shs 1,200,000
  • 1 Switch: Shs 190,000
  • 5 computer tables and chairs Shs 650,000
  • 1 Multipurpose machine (print, copy, scan): Shs 1,350,000
  • 1 Inverter (24 V, 2 batteries): Shs 1,800,000
  • 5 webcams and headphones (microsoft): 628,000
  • 1 UPS (APC): Shs 220,000
  • 1 Internet cafe software and anti virus: Shs 380,000
  • 1 cabling (e.g RJ 45 cables): Shs 210,000
  • 1 Labour (network configuration $200): 560,000

Sub total: 11,648,000

Other start up costs

  • Internet installation (UTL): Shs 700,000
  • Rent (3 months @500,000): Shs 1,500,000
  • Legal costs(incorporation of company etc): Shs 500,000
  • Miscellaneous costs(transport, communication): Shs 200,000

Sub total: 2,900,000

Grand Total (Equipment plus other): Shs 16,048,000

AND NOW THE PROS

1. Continued growth of internet usage in uganda

Judging by a World bank report on Internet usage in Uganda I can expect that we shall continue to experience more users on the internet. I did mention that we have a growing number of people using internet in their homes but as almost 50% of the population is barely earning minimal wage I expect that in the foreseeable future internet usage especially outside Kampala will continue to primarily be through internet cafes. There is therefore continued relevance of the sector

2. Expected profitability and return on capital

So the million dollar question "Is it worth investing in?" Well I summarise the position below from my estimates:

Profit forecast

Total monthly revenue: Shs 1,157,000 (see Note 1 below)

Total monthly costs: Shs 1,400,00 (see Note 2 below)

Loss per month: Shs 243,000

Note 1: Revenue assumptions

a) Revenue from computers
4 computers, each being used for 6 hours a day, charging Shs 1,500 per hour for 26 days in the month(6 days a week). 4 x 6 x 1500 x 26 = Shs 936,000

b) Revenue from multi purpose machine

(i) printing- Shs 500 per page for 10 pages per day for 26 days in a month. 500 x 10 x 26 = Shs 130,000

(ii) Scanning- Shs 500 per page for 5 pages per day for 26 days in a month. 500 x 5 x 26 = Shs 65,000

(iii) Photocopy – Shs 100 per page for 10 pages a day for 26 days in a month. 100 x 10 x 26 = Shs 26,000

Total revenue from multi purpose machine: Shs 221,000

Total revenue: Shs 1,157,000

Note 2: Expenses:
  • Internet: Shs 200,000
  • Rent: Shs 500,000
  • Repairs and maintenance(of equipment): Shs 100,000
  • Supplies (cartridge, paper et al): 100,000
  • Salary (2 staff): 400,000
  • Miscellaneous costs: Shs 100,000
  • Total expenses: Shs 1,400,000

Loss per month: Shs 243,000

On the basis of the above, therefore you will never recover your initial capital invested.

So from the above analysis it would seem that it is pretty tricky to invest in this business but these are merely assumptions.

The revenue from the multi purpose machine could for example be higher and some costs can be reduced or example rent can be lower depending on location. An internet cafe does not have to be on ground floor of a building. Alternatively, repairs and maintenance have to be watched closely as computer equipment is often getting spoilt.

In addressing the profitability issue, I set out my further thoughts in point 3 below.

3. Diversification and franchising opportunities

This business model has three major opportunities that can increase revenue and turn the loss identified in 2 above to a profit;

1) WIFI hot spot.

Assuming you have a wireless router in the building, you can charge neighbours or laptop users a fee to get access to your internet. These users may often have their own laptops/PCs in private and as such they tend to stay on computers longer than traditional cafes.

Assuming in the above model, if you then charged say Shs 1,000 per hour for each hot spot users, Assuming 4 users per day for with combined use of 4 hours per day for 26 days will increase revenue by Shs 416,000 without an increase in over heads. You will therefore then have a profit of Shs 394,000 and now your return on capital is 7 years.

2) Call shop opportunity

Combining the internet cafe model with a call shop say one using VOIP technology such This company can yield better results as the fixed over heads will not necessarily change (except say internet for the phones as these are bandwidth intensive). This however requires additional investment but there is an opportunity to have additional revenues here in the range of Shs 40m a year. I have written about investing in a VOIP company in a separate article.

3) Internet cafe "coalition"

If internet cafes that seem to be currently independently owned started forming "coalition" groups which would be loose affiliations similar to franchises and say had collective marketing on say on websites and on face book, then this will create a "branch effect" just like i mentioned for Kayenet above. The advantage it gives is that a customer looking for an internet cafe say in town will simply go to a "sister" cafe of their own local cafe with the expectation that this too has similar services, prices and reliability.

This has the advantage of becoming almost like a "referral" business and ensures constant revenue for those in the network other than just persons in the vicinity.

Likewise the "coalition" can undertake joint marketing. Facebook advertising for example can be set as low as $2 per day and can specifically target "People in Uganda".

What this means is that if you are logging into facebook from Uganda, facebook target advertising is cleverly done in such a way that these Ugandan Ads only appear for Ugandan users and the advertiser will typically pay facebook on the basis of pay per click or pay per impression (number of times advert is "displayed" to Ugandan users).

My guest writer weighs in.

[Pure] internet cafe business is not viable or profitable venture anymore because internet in Uganda is much cheaper and easily accessible.

Three major Telecos ( Warid, Orange and MTN….Airtel is doing the upgrade ) have a 3rd generation mobile telecommunications( 3G Network).
Recent 3G releases, often denoted 3.5G and 3.75G, also provide mobile broadband access of several Mbit/s to smartphones and mobile modems in laptop computers.
The bandwidth and location information available to 3G Networks and devices gives rise to applications not previously available to mobile phone users. Some of the applications are:

  • Mobile TV
  • Video on demand
  • Videoconferencing
  • Telemedicine
  • Location-based services

This basically means data speeds are faster right on your mobile phone at cost as low as Shs 1000 for a whole day. The Telecom companies give a mobile phone internet user Value added services of free social media website like Facebook.

because Uganda is connected to the rest of the world by more than 3 under sea cables and more are being laid so the internet costs will keep dropping with speeds improving.

[Furthermore] Internet is [increasingly being] provided as Value added service is some industries like in restaurants, libraries, Banking halls, shopping malls and cafes so i think the internet cafe bubble burst.

But for those still operating i think they should change their business model to a business center [with for example] basic IT training.

SUMMARISING AND THE FINAL WORD

First the numbers

On the basis of my analysis:

  • Capital investment(A): Shs 16,048,000
  • Revenue per year: Shs 13,884,000
  • Profit per year (revenue (including WIFI) and excluding all expenses) (B) is Shs 2,076,000
  • Return on capital(years to get capital back or A/B) is 7.01 years
Now the basics you must get right before investing.
  • Internet stability and reliability. Get a good ISP
  • Diversification of services. Don't only do Internet services, consider a multipurpose machine, WIFI hot spots or even Internet telephone services using VOIP
  • Get an IT person.
FINAL WORD, YES OR NO?

I would invest in this sector but particularly look at the potential diversification opportunities I have highlighted above as a "pure internet" cafe is going to be facing stiff competiton in the future not only from other cafes but also from the telecom providers who continue to provide cheap internet for home users.

My guest writer has basically hit the nail on the head and he echoes similar views as mine; the pure internet cafe bubble burst and so the internet cafe investor should consider diversification of services because of the stiff competition from the telecom providers who are making internet much cheaper by the day.

Otherwise best of luck and if you need some help, please speak to us.

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And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not rely on the information given here to base your investment decisions. You should seek business advice from a professional knowledgeable of your specific circumstances. I shall therefore not be held responsible for any loss you may incur when acting on this information.

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