The Internet Cafe Cartel

Back to Contents of Issue: January 2002

Business decisions in a Korean enclave in Tokyo may provide a glimpse into the future of Japan's wired cafe society.

by Richard Meyer

The Okubo section of Shinjuku is best known for love hotels and bars serving scotch with far too much water. But the neighborhood has also become home to a lot of Internet cafe. Interspersed among the area's traditional establishments, signs offering cheap Web time beckon.

The origin of Okubo's cafe culture is obvious to anyone walking through the neighborhood's streets. The area is populated by a large number of people from South Korea, the country with the highest rate of broadband usage in the world. It is only natural then that, along with kimchi, Korean restaurants, and Hangul signs, Okubo has a large number of public Internet terminals.

Indeed, little Okubo may have the highest density of Internet cafe anywhere in Japan. Koreans have taken to the (wired) Internet as much as the Japanese have resisted it, and their relative propensity for high-speed lines and personal computers is evident in this Korean enclave. "Korea is about three years ahead of Japan in terms of the Internet," says Chang Nam Han, 36, president of Taeil Corp., which operates a Net cafe in the area.

Han's cafe is not particularly fancy. A simple operation in a nondescript office building just north of Kabukicho, it has about 40 workstations and is dimly lit. It is nothing compared to the Internet cafe that double as manga (comic book) libraries in Tokyo's Shibuya district, where the free drink bars are almost as impressive as the broadband connections. But Han has a loyal following. On a recent Thursday night, the place was running near capacity and people were greeting each other like old friends.

It would be easy to dismiss the action in Okubo as niche activity that has very little relevance to Japan's massive electronic economy. After all, a majority of the country still accesses the Internet via handsets. And early reports from broadband providers indicate that this hasn't changed. Japanese customers are not dropping their i-mode phones in favor of personal computers and high-speed lines. Han himself has no delusions of electronic grandeur. He concedes that 95 percent of his customers are Korean, and he professes no desire to build any kind of Internet empire. He does plan to open another shop, but that will also be in a Korean area. It is very possible that Internet cafe will remain on the margins of Japan's electronic society and that Okubo will remain an oasis in Japan's Internet cafe desert.

It's possible, but not likely. With the Japanese government implementing a plan to wire Japan with broadband connections (10 million customers by 2005) and with competition breaking out in the fixed-line Internet access business, making Japan's high-speed lines some of the cheapest in the world, the country could experience a significant increase in the number of public terminals available. According to one consultant, NTT DoCoMo engineers say the company believes its competition of the future will come from fixed-line Internet providers. A year ago, they said they were most concerned about mobile phone giant Vodafone.

If fixed-line Internet providers do flourish in the future, Okubo may be more than just a quaint cultural quirk. What has happened in Okubo, at least as far as Internet cafe are concerned, may happen all over Japan.

As is usually the case in Okubo, business comes with a certain element of intrigue. Han says another Internet cafe owner in the area, also a Korean, decided to lower his prices in order to attract customers. Offering access at rates 25-30 percent cheaper than others in Okubo, the cafe attracted many students on tight budgets. It also offered free computer classes and other incentives. Han and the 10 or 11 other Internet cafe owners in the area decided to pay the price-cutter a visit to discuss his tactics. But he says the man, who Han would not name, did not show up to the meeting.

Han says he wants competition. But he wants it to be fair. He believes that the man who is selling Internet time cheaply is being too aggressive and using his personal wealth to gain market share and force others out of business. Han and his cohorts decided they would stick together and agreed not to join in the price war. They set their prices at the same level: JPY1,000 for three hours of Internet time. In other words, they formed a cartel.

The "JPY100 shop," as the discounter is derisively called by his competitors, is still drawing business. But Han and his comrades may win in the end. He says that the man who is offering the low prices also owns a Korean grocery and a Korean restaurant and that many Koreans in the neighborhood, upset at his aggressive tactics, are beginning to avoid his establishments.

It could be argued that the battles in Okubo occurred largely because of culture or location and that as the Internet cafe market grows into the mainstream, it will become more sophisticated. But even Japan's most advanced industries have their own "JPY100 shops" and their own gangs. Indeed, the Korean Internet cafe have a lot in common with Japan's larger, more established information technology companies. Collusion, pitched battles, dumping, and cooperation are as much a part of the world occupied by DoCoMo, NEC, and Matsushita as they are a part of Okubo. It would be a mistake to blame the Internet skirmish in Okubo on the fact that the businesses are small, in a seedy part of town, or owned by Koreans.

Early signs indicate that Japan's Internet cafe market is developing a lot like the Internet cafe market in Okubo. As in Okubo, pricing is the major issue in the larger market. When Internet cafe were almost nonexistent in Tokyo, the prices were high, with access time costing about JPY1,000 an hour. As the market has grown and as companies have started fighting for market share, prices have fallen. And the prices are beginning to feel somewhat predatory. While most cafe charge somewhere between JPY300 and JPY500 an hour, free time is not unknown and incentives are being offered. @

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