It's the UK's largest net cafe chain but web access is not Internet Exchange's key revenue stream, says Yinka Adegoke
When Internet Exchange recently announced it had snapped up the Input/Output network in a deal that made it the UK's largest internet cafe chain, many new media industry observers were surprised that they had not previously even heard of the company.
Yet the acquisition of the 19 Input stores, for an undisclosed amount, saw Internet Exchange's (IE's) national coverage doubling to over 40 outlets spread across some of the most footfall busy areas in the country.
Even more impressive is the fact that these 40 wholly owned stores will hit the 50 mark by year end and are part of a larger European network of franchise and affiliate stores that currently tops 250 outlets. The network spreads from the UK to France, Germany, Benelux and Spain so far.
The UK internet cafe sector has historically had a low retail and internet industry profile. One of the best known and oldest locations for net heads is Cyberia Cafe, launched back in 1994 by current Zoom UK MD Eva Pascoe in London's West End. But, as well respected as Cyberia is as the UK's first major branded internet cafe, its expansion has been limited to two more stores since launch.
The concept of internet cafes as a serious retail chain proposition was given its biggest boost by Stelios Haji-Iannou's easyEverything, which kicked off in June 1999 and is already hoping to float next year. So far easyEverything has nine outlets in the UK and on the Continent but has major plans to expand, opening another 11 stores in Europe and the USA by year end after securing a further 25m [pounds sterling] in venture capital funding. With sites at high footfall traffic locations, easyEverything focuses on price and convenience in keeping with its parent brand.
The Europe-wide network is the crux of IE's strategy. It is an in-store media sales mesh which allows it to leverage its clients' online advertising, promotions or general web presence into the IE high street outlets. Clients include Amazon, Clickmusic, Stepstone and Legal & General. IE sees itself as more than a place for customers to surf the Net and this same philosophy is spread into the look and feel of the stores.
Walking into some of the newer outlets, such as the London Baker Street branch, you would be forgiven for thinking you had accidentally strolled onto the set of TV series Friends. For the most part the stores are airy, spacious and modern with a mixture of hard and soft seating. The sleek flat-screen computers supplied by Fujitsu are either standalone on functional desks or fixed to the walls.
Chief executive officer Mark Hudson describes the stores as relaxing. He says: "It's like a hotel lounge. You can come in, have a coffee, read papers and then go online. You don't have to go online straightaway."
All the high street outlets, and some of the others in locations such as airports, motorway stations or the Millennium Dome, have an in-store coffee shop franchise/partner from one of the major coffee shop players. Partners include Starbucks, Coffee Republic and Costa.
The presence of the coffee shop is intricately linked with IE's history. Founded in 1996 by Robert Proctor, the first outlet in Whiteleys shopping centre in west London was a catering concern. But Proctor had more exciting ambitions than selling coffee and cakes and decided to open an internet side to the business. In 1997 the company raised 1m [pounds sterling] funding from Smedvig Capital and sub-let the coffee shop space in the stores.
At the end of 1998 it bought a media sales house called Mediafit, which brought the skills to sell advertising space, both online and offline, across a network of cafes.
Hudson, who joined in 1999 from Bain & Co, says that with seven stores and growing the company realised the cafes were a low cost media channel to market to individual and corporate customers. He says: "It's not designed like a cafe but as a customer collection machine. It's about creating a population to sell products and services to."
The outlets are a rare opportunity for individuals and advertisers to interact while the customer is surfing the Internet. Hudson says: "The Internet is a very remote medium and the cafes allow us a period of time during which we can influence the customer online through in-store marketing and staff activities."
This is where the company sees itself making its most profits. In an age where the cost of internet access is falling while access is becoming more readily available via mobile phones, personal digital assistants and digital television, IE believes its future lies with added value services to consumers and corporate clients.
This is the thinking behind driving footfall with its feel rather than cost. It charges on average around 3p to 7p a minute while its biggest rival easyEverything charges an average 1 [pounds sterling] an hour. But the easyEverything philosophy is fundamentally a numbers game, argues IE -- a `stack `em high, sell them cheap' approach if you like. Most easyEverything outlets use about half the space that IE uses per PC, according to Hudson. IE has about 30 PCs per outlet with the average store measuring 1,200 sq m.
The media sales network is a customer acquisition drive. All stores in the network, over 200 across Europe, feature in-store advertising for the client, with posters, desktop leaflets, mouse mats and homepage advertising all pointing to the client's site. The clincher is the staff who don T-shirts and caps featuring the client's logo or promotion and help drive customers to the site. IE is paid on a straight in-store/ online advertising basis but also per customer acquisition. The company can market clients' product and services to its registered member base, which stands at around 120,000.
The other side of its corporate offer is its in-store training facility, available to companies and individuals. It is an especially margin-friendly part of the business and has been given a huge boost by the Input/Output stores.
These stores, all located in local libraries, will be "subtly" transformed to the IE brand, says marketing manager Alison Bell. There is a chance they will be called Internet Exchange Learning Centres but a final decision has not been made. The Input stores have had minimal branding and a more spartan look than IE stores but management is expecting to change this look as well.
The company is not pushing its retail brand aggressively nationally. It has concentrated on local marketing where its stores are based. But this is set to change towards the end of the year as it looks to a big push in the run up to Christmas.
The internet industry is already talking about the importance a chain like IE could have in making the Net a reality for first timers and convenient for workers as numerous companies begin to clamp down on internet usage during working hours. But Hudson reveals that internet access now accounts for less than 30 per cent of revenue so it is clear that its added value/corporate approach is essential for its long term future. In the meantime IE is hoping to weather its current losses in time to be able to hit the stock market in the none too distant future.
Internet Exchange fact box Year 2000 (forecast) Sales 10m [pounds sterling] Network 250 Av. customer spend 2.20 [pounds sterling] Cost per min online 3-7p * Av. footfall per week 45,000 * Total customer UK network 250,000 * Total Europe network 500,000 Year 1999 Sales 1.6m [pounds sterling] Network 75 Av. customer spend 3.00 [pounds sterling] Cost per min online 10-12p * Av. footfall per week * Total customer UK network * Total Europe network Year 1998 Sales 600,000 [pounds sterling] Network 7 Av. customer spend NA Cost per min online NA * Av. footfall per week * Total customer UK network * Total Europe network
Source: Internet Exchange
* Yinka Adegoke is news editor of New Media Age
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