Start-Ups Offering Santa Monica Net Gains, Challenges
In just a few short years, the economic impact of Internet companies has grown to rival that of entertainment firms in some pockets of Southern California such as Santa Monica, according to a new study. But the growth also presents new challenges for the cities where Net firms reside.
The research, being released today by economist Lisa Grobar of Cal State Long Beach, shows that 125 Internet start-ups now employ about 5,000 people in Santa Monica, or nearly 7% of the city’s total work force. That compares with about 4,200 jobs in motion pictures, music and publishing, the study found.
Although the Internet companies are young, they are already paying salaries that rival those in the entertainment industry. In Santa Monica, the average annual compensation at Internet firms--including stock options--was $101,500, almost equal to the average compensation of $107,244 at Santa Monica motion picture companies.
The study shows that while investors have had mixed success cashing in on the stocks of Internet firms, the cities that house them have certainly benefited economically.
“Santa Monica begins to give us a sense of the contribution of this industry to our economy,” said Grobar, an associate professor of economics at CSULB. The study also “points to an encouraging long-run potential that takes advantage of the natural synergy with Southern California’s strength in technology and entertainment,” she said.
While the study focused on Santa Monica, similar trends are likely to affect other cities and regions with clusters of Internet businesses, including Pasadena, the Costa Mesa-Irvine area and Woodland Hills, she said.
Although the study’s initial findings paint a picture of Internet prosperity for the areas fortunate enough to play host to these businesses, the volatile nature of Net start-ups--and their reliance on a fluctuating stock market--produces new planning challenges for cities, Grobar said.
The industry is characterized by uncertainty. Within Internet companies, layoffs and even complete shutdowns are far more common than profits.
That means there’s no guarantee that salaries will stay high. Grobar’s finding that average compensation topped $100,000 is based on statistics from late 1998 and 1999, a period of soaring stock market valuations for Internet businesses that allowed many workers to cash in stock options at great profit.
It’s not clear whether the sagging market for Internet stocks this year has crimped the free-spending ways of the industry’s youthful work force.
And while a city such as Santa Monica might cultivate an Internet cluster, it risks losing its most successful companies if it can’t provide office space to accommodate large firms.
Online toy retailer EToys spent its first three years in Santa Monica, eventually taking space in five separate buildings in a business park near the city’s small airport.
When company executives searched for a new facility that could house its 500 Santa Monica-based employees under a single roof, they hoped to find something in Santa Monica but couldn’t. Instead, EToys last month moved about a mile away into the western edge of Los Angeles.
“For us it was about finding 150,000 contiguous square feet,” said Gary Gerdemann, senior director of communications for EToys. “It’s not easy finding a nice chunk of space in Santa Monica.”
EToys was willing to renovate an existing building to accommodate the company in Santa Monica, but even with an 18-month lead time the job couldn’t be accomplished in time, Gerdemann said. In Los Angeles, by contrast, the building and permitting process was faster, he said.
The loss of a company such as EToys should be of concern to Santa Monica, Grobar said. Although it is an Internet retailer, it still charges sales tax to California customers, generating important tax revenue for the city.
Also, Internet companies tend to spring up in communities with vibrant restaurants and entertainment establishments and an active retail economy. Retail sales in Santa Monica grew at 8.6% last year, nearly a full percentage point ahead of Los Angeles County, Grobar said.
Direct Stock Market, a growing dot-com founded in a Santa Monica garage seven years ago, is an example of how Internet companies help a city’s economy. Of its 35 employees, about 25 live in Santa Monica, including some who moved to the city after joining the company, according to founder and Chief Executive Clay Womack. Even those who live elsewhere frequently go out to lunch or dinner in Santa Monica, generating sales tax revenue for the city.
Yet Santa Monica officials don’t seem to be worried that the city’s lack of office space--its office vacancy rate is less than 2%--will dampen its economic vitality.
“As companies move to other areas or go out of business, there are other companies looking for space,” said Mark Richter, Santa Monica’s economic development manager. “We seem to have a ready pipeline of backfill.”
A similar boom in media and entertainment companies has created keen competition for office space that will absorb any vacancies, Richter said.
Large office projects built in recent years have added to traffic and congestion in Santa Monica. As a result, the city is content to make do with its existing stock of commercial real estate rather than rush to develop large office projects, he said.
Those projects are popular with growing companies, however. XDrive, which provides free digital storage space on the Internet, grew to fill seven buildings spread out over 1 1/2 city blocks in Santa Monica. The nearly 2-year-old start-up is about to move to the city’s tony Water Garden, where companies can easily expand by leasing additional office space. The Water Garden also provides ample parking for XDrive’s 196 employees, a commodity in short supply around Santa Monica, said Josh Berman, senior voice president of corporate development.
Direct Stock Market, which sells private corporate securities over the Internet, has moved three times since Womack founded the company in his Santa Monica garage in 1993.
Womack just signed a seven-year lease to move his company into a 14,000-square-foot office above the Third Street Promenade for $2.85 per square foot. If he were willing to move to Culver City, he could have paid about $1.50 or $1.75 for office space.
A Santa Monica address can be a powerful recruiting tool, especially in a tight dot-com job market. Being three blocks from the beach and walking distance from 35 restaurants helped Womack lure technical employees from companies farther inland and from locales such as San Francisco and Santa Barbara.
“I’m sure we could have found space cheaper, but the quality of life is great,” said Womack, whose commute takes seven minutes by bicycle.
Paul Gigg, XDrive’s chief executive, said Santa Monica’s proximity to LAX is another important plus. He also praised the city for its “good selection of high-quality hotels with good locations. We’re able to use those as business venues for meetings when we have investors or potential partners coming in.”
But Womack is not entirely enamored with the policies of Santa Monica, which is famous for its liberal politics.
“They say they’re business-friendly and then they throw all these taxes at you,” such as the Bayside District tax he pays because Direct Stock Market is close to the beach. “I don’t think that’s fair. Why should I have to pay extra just to have an office down here?”
Direct Stock Market has yet to turn a profit, but when it does move into the black, tax considerations may force Womack to reconsider his cherished Santa Monica location.
“I don’t know what the fiscal impact will be once we get serious profits,” he said. The company might move if the city “started laying on more egregious taxes for social programs.”
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Casting a Wider Net
Internet companies have become an important part of Santa Monica’s economy, according to a study by Cal State Long Beach. More than 100 Internet start-ups employ nearly 5,000 people in Santa Monica, or about 7% of the city’s total work force. Here is a look at how Internet employment stacks up with other media in the city, and how pay compares:
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Employment (Second quarter of 2000)
Internet: 4,840
Film industry: 3,516
Publishing/music: 703
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Average payroll(1999)
Film industry: $107,244
Internet: $101,500
Music: $58,371
Publishing: $43,509
Source: Cal State Long Beach
