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The Cutting Edge: Focus on E-Commerce

Start-Ups Offering Santa Monica Net Gains, Challenges

Study finds Internet firms based in the city have been a revenue boost, but a shortage of office space has come into play.


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."

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