There are no official figures on the size of the cybercafé market in India, which has low entry barriers and is dominated by the informal sector. Saboo reckons that of the 250,000 cyber-outlets in India, only 4%, or 10,000 outlets, are organized. This includes private players like Sify and Reliance, which have a pan-Indian cybercafé presence. Most of the cafés--those ubiquitous mom-and-pop shops occupying between 100 and 300 square feet of space--are run by entrepreneurs. These cafés have survived on pirated software, charging from 25 cents to a dollar for an hour's use. Now, however, they must register their outlets with local authorities, who ensure that they use legit Microsoft (MSFT) software for each of their terminals. This often requires them to upgrade their PCs, and those who cannot afford to comply simply shut down.

Turning Away Customers
One of the first cybercaf&eacutes was set up by Dilip Chitalia opposite Churchgate rail station in downtown Mumbai over a decade ago. Chitalia, who runs a small printing and photocopying business, offered the Net as a peripheral service.

Ten years later he gets around 70 users a day who pay $1 an hour, down from $3.50 when he first opened. He turns away at least five customers a day for lack of proper proof of identification. His clientele includes college students, foreign tourists, and sundry users.

In the past year, he spent over $2,500 to upgrade his 10 terminals with the latest Microsoft software, and shuts the café by 8:30 p.m. instead of midnight as he once did. "We are always doing business with fear," says Chitalia. With the cops dropping in four times in the past eight months, Chitalia plans to install a closed-circuit television to appease them. He's already begun dabbling in stocks as an alternative in case business becomes untenable.

The clampdown has become more visible in Mumbai in the past six months. Five years ago, the city was the largest cybercafé market in India, with a 20% share. There are only 600 outlets left in the city, down from 2,000, a 70% drop since 2006. The shrinking numbers are also attributed to the growing affordability of home PCs. In the past two years, average PC prices have fallen to $420 from $930.

Shades of BlackBerry Eavesdropping
At the same time, higher real estate costs, registration fees, a dwindling clientele, and the constant fear of cops swooping down are forcing entrepreneurs to wind up their businesses. "There is no one reason to trigger a raid. It could be a bomb blast, an abusive mail complaint, or even a tip-off on adult sites' usage," says Dilip Sawant, a cybercafé owner and activist. On July 3, complaints about an abusive mail in Panaji, the capital of Goa, led authorities to issue orders for caf&eacutes owners to provide customer identity information throughout the northern part of the state. "Every country nails Internet users based on circumstantial evidence, but nobody creates an uproar like in India," says Saboo of the Internet providers' association.

That's nothing new. There was pandemonium in March 2008, when India decided to eavesdrop on BlackBerry phone users (BusinessWeek, 3/21/08).

The Indian telecommunications department told telecom carriers, Internet service providers, and BlackBerry manufacturer Research in Motion (RIM) of Canada that it wanted to eavesdrop on the calls and e-mails from every BlackBerry in the country. The reason, said intelligence officials, was that terrorists using BlackBerrys were avoiding detection. Four months later, New Delhi and RIM are still fumbling for a solution.

Getting Rid of Pirated Software
But not all cybercafé patrons are wary about giving out information. "I'm game to divulge details if that's the way to prevent misuse," says Nimisha Parekh, a college student and cybercafé regular. Indeed, some say it's a positive sign for the authorities, who are going all out to bring some method to an unregulated business that survived on fake software. It also means a lot to Microsoft, which is struggling to curtail the rampant use of pirated software. "Unfortunately, this business is taken lightly by entrepreneurs. Monetizing legal software is critical to our mission," says Latif Nathani, general manager, Unlimited Potential group at Microsoft India.

Also, concerted attempts are under way to bring digital communication to rural India. In the past eight years, over 100 projects were announced to bring connectivity to the rural masses. The lack of bandwidth stalled the projects' expansion. In May 2008, New Delhi said it would invest $2 billion to set up 112,000 broadband centers in rural India this year. "Given India's diversity, there is a need to bring computing experience to a large part of the population," says Pranav Roach, president, Hughes Network Systems India. Hughes, which has so far built a network of 2,000 Net kiosks in India, plans to scale up to 20,000 by end 2009. "It's all about content, connectivity, and operator. The game's just begun," he adds.