Internet Economy’s Boom Not Shared by All Regions
The popular wisdom on e-commerce is that it can be conducted from a mountaintop, a Pacific island or anywhere else with both computers and telecommunications. Social thinkers such as George Gilder began predicting in the mid-1990s that the Internet would mean the “death of cities,” with people and businesses fleeing to more alluring locales.
So why is San Francisco technology entrepreneur Marc Benioff deferring his dream of launching a “dot-com” company in Hawaii? Because, in the Aloha State, “there aren’t many people who know how to program computers, and that’s a problem,” Benioff lamented.
At this early point in the history of e-commerce, Internet firms aren’t much considering Maui. Instead, they are sprouting in such densely packed, technology-blessed places as the San Francisco Bay Area, New York City’s Silicon Alley and assorted high-tech pockets around Southern California. Companies that support them, such as United Parcel Service, are expanding in traditional transportation hubs.
In that and other ways, e-commerce--the sale of products and services and the distribution of commercial information via the Internet--has defied its image as an ethereal, “virtual” phenomenon. It is proving to be an earthly business force that is reshaping regional economies and urban development strategies.
Not all of the effects are for the better. The intensified business competition being unleashed by e-commerce threatens some merchants and localized industries, as well as communities dependent on them for jobs and tax revenue.
Already, real estate financiers are shying away from investing in strip shopping centers with “big box” stores vulnerable to e-commerce and other competitive pressures.
Yet e-commerce is creating a small number of big regional economic winners, mainly metropolitan areas on the East and West coasts that have bred lots of dot-com companies.
“The rules of the road for getting started in e-commerce are like the rules of the road for getting started in movies. You can’t do it from the middle of nowhere,” explained Thomas A. Horan, executive director of the Claremont Information & Technology Institute at Claremont Graduate University.
As such, Internet firms are helping revitalize some cities and are bucking the longtime exodus of business to outlying suburbs and low-wage American heartland communities.
One sign of the times is E-Steel Corp., a leading online marketplace for steel sellers and buyers. It’s based in New York City rather than in a traditional steel town such as Pittsburgh.
Michael S. Levin, the company’s founder and chief executive, said New York makes sense for his e-commerce company because it needs not only expertise in the steel industry, but also “access to ideas, investments, capital markets, global partners and global access through major airports.”
Also benefiting from e-commerce are cities serving as international and regional transportation hubs, even those with few home-grown dot-com companies. As e-commerce customers buy more and more items from faraway sites, demand grows for warehouses, air freight and other transportation services found in these communities.
UPS, whose package-delivery business has climbed lately with the help of e-commerce orders, provides a textbook example.
The company is in the midst of its biggest expansion ever, a $1-billion project at its package-sorting operation in Louisville, Ky., where UPS has its main air transportation hub. The company’s employment in the Louisville area is expected to climb from 17,000 to about 23,000 in two years. It is also growing in Philadelphia, Chicago, Miami and, locally, at the Ontario airport.
“All I know is that we have a lot more packages coming through our operation that say ‘dot-com’ on them,” said Mark Dickens, a company spokesman in Louisville.
Another emerging regional winner is the Reno area, a longtime warehousing center that is becoming home to distribution centers for e-commerce companies. Online shopping juggernaut Amazon.com opened a facility there last year. Its major rival in the book e-tailing business, Barnes & Noble.com, is building a distribution facility at a nearby site.
The overall impact of e-commerce on regional economies is just beginning to be assessed. The topic is so new that much of the hottest research comes from young graduate students. And even they have developed only rough gauges of where e-commerce businesses have clustered.
By any measure, though, the stakes are high. Forrester Research, a Cambridge, Mass., company that tracks Internet trends, estimates that U.S. firms’ online sales to consumers and, in particular, to other businesses will skyrocket from less than $200 billion last year to $2.9 trillion in 2004. Analysts say the recent upheaval on Wall Street will do little or nothing to slow this trend.
In industries ranging from automobiles to agriculture, big companies are forging alliances to set up business-to-business e-commerce exchanges for handling transactions with their suppliers and customers.
What’s more, the technology companies prospering from e-commerce aren’t just the ones selling online. Other big beneficiaries are businesses whose products or services support the Internet infrastructure, a list that includes Bay Area giant Cisco Systems Inc., along with Dulles, Va.-based America Online Inc. All told, the University of Texas’ Center for Research in Electronic Commerce found that e-commerce accounted for 2.3 million jobs and $507 billion in revenue at U.S.-based companies in 1999.
Early indications are that as long as innovation in the commercial development of the Internet continues, a small number of regions will reap a disproportionate share of the e-commerce riches.
E-commerce business “is certainly not as spread out as, say, the insurance industry or light manufacturing,” said Robert D. Atkinson, director of the technology and new-economy project for the Progressive Policy Institute in Washington.
In the absence of figures showing region-by-region employment, sales or personal income resulting from e-commerce, experts have developed other economic measures.
For instance, UC Berkeley doctoral candidate Matthew A. Zook has demonstrated that five metropolitan areas--led by the San Francisco Bay region, followed by Seattle, New York, Los Angeles and Washington, D.C.--account for the overwhelming majority of Internet activity.
Specifically, Zook determined that Web sites tied to those five metropolitan areas accounted in February for more than 70% of all American computer users’ “page views”--a measure of Internet visits. The assumption is that the vast majority of those visits were to e-commerce Web sites, rather than to government or academic sites.
The common trait of the metropolitan areas emerging as e-commerce’s big winners is that they have been magnets for creative, technologically savvy workers. The proximity of talent is particularly important during these early years of e-commerce because the payoff from expanding swiftly and establishing dominance in an emerging business can be huge, as many dot-com millionaires can attest.
Even if you could save money on office rent and wages by setting up headquarters in Cleveland, the time you might lose searching for expertise and financing there could enable a faster-moving competitor to crush you.
Also, much the way that telecommuting makes it easier and less expensive for people to live in big cities, e-commerce could make it easier and less expensive for businesses to operate there, too. Traffic congestion, for example, is less of an issue for a company’s sales force when more transactions are handled over the Internet and fewer are done in person.
As a result, companies with a heavy demand for cutting-edge technological expertise generally have tried not to stray far from e-commerce centers.
The Los Angeles area has benefited from the rise of e-commerce both as a major freight transportation hub and as the home to lots of media-related dot-com companies.
Emblematic of the transformation locally is the development of the $40-million Los Angeles Media Tech Center near graffiti-tagged, rundown neighborhoods in Echo Park.
The project, being built on the old Taylor Yard railroad site, is designed to attract e-commerce merchants and other “new-economy” companies that want warehouses or offices within easy reach of areas such as Burbank and downtown L.A.
Likewise, newly hatched e-commerce companies have intensified demand for office space in long-established business areas, including Santa Monica, West Los Angeles and Pasadena. One prime example is local e-commerce powerhouse EToys Inc. Founded just 2 1/2 years ago, the company has grown to 550 employees and is moving into a new 150,000-square-foot headquarters in West Los Angeles’ Westside Media Center this fall.
Like any revolutionary technology, however, e-commerce figures to create economic upheaval for some regions and neighborhoods.
The threat of competition from online retailers has contributed to a downturn in investment in shopping center construction and renovation. If that trend isn’t reversed, “you’ll see a lot of blight. What happened to the inner cities you’ll see in a lot of the older suburbs and small cities, too,” said Carl Steidtmann, a retail economist for PricewaterhouseCoopers in New York.
AMB Property Corp., the giant San Francisco-based real estate company developing the L.A. Media Tech Center, decided last year to sell its $1-billion portfolio of shopping centers partly because of the specter of online retailing. Tellingly, perhaps, AMB hasn’t left retailing entirely. It’s an investor in Webvan Group Inc., an online grocer.
Also at issue is what will happen to cities heavily dependent on a single industry--say, Detroit or Houston--as their dominant industries increasingly exploit the Internet. Their industries could prosper from reduced purchasing costs, but e-commerce also might eliminate the jobs of many middlemen in their communities.
As e-commerce and the skills it requires become more widely established, the wanderlust of entrepreneurs such as Benioff will presumably become easier to satisfy.
Benioff, chairman of the year-old San Francisco-based Salesforce.com, says he will start his next e-commerce venture in Hawaii at the outset. It could take five years or so, he says, because the state still doesn’t have enough skilled computer professionals.
Once he overcomes that hurdle, Benioff said, hiring shouldn’t be a problem. When he broaches the idea of setting up a dot-com in Hawaii to business associates, Benioff said, “they just want to know when the next plane is. They’re ready to go.”
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‘Dot-Com’ Concentrations
The biggest U.S. metropolitan areas tend to be home to the most businesses with “dot-com” domains, or corporate Internet addresses, largely because of their size. But the picture changes when you look at another gauge of dot-com locales: the ratio of dot-com domains to the overall number of businesses in a region. By this measure, a number of smaller metropolitan areas such as Provo-Orem, Utah, and Las Vegas show up as e-commerce leaders:
San Francisco: 1,368
Provo-Orem, Utah: 1,299
San Diego: 1,013
Los Angeles: 992
Las Vegas: 913
Phoenix: 879
Austin, Texas: 869
Miami: 811
Washington: 762
Santa Barbara: 733
Note: Some businesses register more than one dot-com domain.
Source: Matthew A. Zook, U.C. Berkeley doctoral candidate in the department of city and regional planning
