Internet economy looks strong, some experts say

The ever-growing Internet economy should be less susceptible to a U.S. economic downturn than many other industries, with more and more people shopping and doing business online, a group of commentators and businesspeople said Friday.

Although many segments of the U.S. economy are slowing, there's little indication of a downturn in online sales, with e-commerce growing four to five times faster than traditional retail, said Rob Atkinson, president of the Washington, D.C., think tank the Information Technology and Innovation Foundation. IT, including the Internet, is currently the major driver of economic growth in the U.S., he said at a Google-sponsored event examining the Internet economy.

While some commentators have worried about a second Internet bubble bursting, Atkinson suggested the first bubble in 2000 and 2001 may have been overstated. Many of the companies publicized as failures during that time frame are either still operating or their business models have become successful through other companies.

"The Internet is not a bubble," Atkinson said. "A lot of dumb, bad companies went out of business [earlier in the decade], but the industry continued to grow."

The Google event seemed to be targeted at commentators who have predicted a second bubble burst, particularly following the hype in recent years surrounding social-networking sites.

But the overall state of the Internet economy is strong, even though the percentage of Google searches for things like real estate and luxury goods have dropped off in recent months, said Hal Varian, Google's chief economist. Those Google searches reflect the state of the overall U.S. economy, he added.

E-commerce has continued to grow in recent months, Varian said. "Yes, we are seeing an economic slowdown," he said. "No, we're not seeing an Internet slowdown."

Online retail sales, not including travel, reached $175 billion in 2007, an increase of 21 percent from 2006, according to Forrester Research. Forrester expects online sales to exceed $200 billion this year and exceed $300 billion in 2011.

While some kinds of advertising may suffer in an economic slowdown, Internet advertising may do better, Varian said. Buyers can measure the effectiveness of Internet advertising, and online ads are often directly linked to a place where consumers can buy the products advertised, he said. Internet advertising based on user behavior can also deliver more personalized ads than traditional mediums, he noted.

While Varian and other speakers sounded optimistic about the Internet economy, venture capitalist Michael Avon, of Columbia Capital, expressed some caution.

Venture capital investing between the fourth quarter of 2007 and the first quarter of 2008 was down about 10 percent in the U.S., he said. However, venture capitalists looking for long-term investments still see good opportunities out there, he added.

Still, Avon urged new companies to diversify their business plans and not depend on one revenue stream. Columbia Capital asks the Internet companies it funds to look beyond advertising for revenue or to branch out into multiple product lines, he said.

New companies should also watch their spending in uncertain economic times. "Just be incredibly careful with cash," he said. "Cash is the No. 1 resource for a startup, and it's never guaranteed."