Where Are All the Internet Cafes Going in Asia?

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Rewind the clock 20 years and walk down a major street in Asia, and you’ll likely see a sign advertising an Internet Cafe. “網吧”, “网吧”, “Kafe Internet”, “PC 뱅”, “อินเทอร์เน็ตคาเฟ่”; these were all signs offering anyone from the everyman to the wayward traveller a chance to connect to the World Wide Web or engage in virtual battle with Zombies, Orcs, or the Protoss.

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Fast forward 20 years and the internet is more ubiquitous than ever. While smartphones are in everyone’s pocket, there are so many things you just can’t do on a 6-inch screen. At the same time, gaming is mainstream; ‘Fortnite dances’ and ‘PUBG’ are in the common vernacular. Internet culture has moved from the crude fringes of society to front and center. So surely in Asia, a crowded continent where multi-generational households are the norm, internet cafes must be bigger than ever, right?

Are The Number of Internet Cafes Declining in Asia?

Despite all signs that the internet cafe industry should be alive and well within Asia, the data shows otherwise. Tax data from Taiwan’s Ministry of Finance has the number of internet cafes dropping by over 50% since 2011.

Over in China, it's a decline though not as pronounced: the number of internet cafes continues to trickle downwards, having peaked in 2016 at approximately 150,000 and hitting 138,000 establishments in 2018. Local analysts believe the industry will continue to decline by 4.5% year-over-year.

Down in Singapore, the capital of rich-world Asia, the trend continues: only 11 are currently operating in the city-state of 4.5 million down from 20 a few years ago.

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However, in the developing world, this trend towards oblivion starts to slow down. While in Indonesia, the number of internet cafes has declined but stabilized, in contrast, in the Philippines this number has grown substantially in the past decade.

Death by Property Values

Within rich-world Asia, property values have exploded in the past two decades. Parts of the continent have gotten much wealthier due to rapid, now peaked industrialization, and excess capital tends to be parked in real estate or other assets as opposed to stocks. When housing prices increase, that trend also impacts real estate zoned for commercial use.

From 2001 to 2017 in Taipei, the house price index rose by 187% (136% inflation-adjusted).

source: tradingeconomics.com

Around Asia, the trend continues. In China, it’s a 64.56% increase in the past decade; Indonesia is 60%; Thailand 49%.

All this is happening at a time when average revenues for internet cafes are falling. In 2013, research from Tencent showed that in China internet cafe revenue was dropping fast due to a dwindling customer base and customers spending less per visit. PC penetration had hit its peak in China, and smartphones had matured to the point where they could satisfy most of the needs of users. Plus, labor costs were on the rise further sapping away profit. Fast forward to 2019 and these trends pushing out internet cafes have only continued.

Broadly speaking this rise in property prices is hurting entertainment establishments at large. Given the increase in costs, it's too tough for many low-margin entertainment businesses to make a go of it. Tax data from Taiwan shows that the number of arcades and bars are also on the decline.

If internet cafes, arcades, and bars are on the decline in Taiwan (as well as many other parts of Asia), then what's filling the space left vacant?

Landlords are always on the hunt for high-margin businesses to occupy their empty shops, and all the while, claw machine outlets are on the rise in the island nation. While the numbers of other entertainment businesses have dwindled, Taiwan has hit peak claw: there were 6,409 of these registered establishments in 2018 compared to only 1,261 in 2010. These unmanned, 24-hour wonders generated approximately US $25.3 million in tax revenue for the first 10 months of 2017.

The Future of Internet Cafes in Asia

For internet cafes, the future lies in emerging markets within Asia such as the Philippines. While the Philippines is experiencing the start of a property bubble in Manilla, given the inequality in development between Manilla and the rest of the country, this isn’t likely to impact the country writ large for some time. Indonesia is also an emerging market, but it has had this property bubble at an earlier point than the Phillipenes given its mature tourism market and overall economic growth.

Nvidia (NASDAQ:NVDA) has taken notice of this market, and is investing in a big way by sponsoring internet cafes through its GeForce iCafe program. Given incomes in the country, high-end PCs are unaffordable right now for many and this sponsorship is a good way to evangelize the product and build brand awareness. This is a long-term play as incomes rise.

But eventually, the Philippines and other emerging markets, like the rest of the region, will experience the same trends and internet cafes will need to fight for their survival or simply fade away.

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