Google's chief economist waxes optimistic about Internet sector

WASHINGTON--The U.S. economy as a whole may not have the sunniest prognosis lately, but Google's chief economist and other industry watchers on Friday diagnosed the Internet sector as relatively healthy.

During a panel discussion at Google's D.C. headquarters, professor-turned-in-house-economist Hal Varian argued that an analysis of search queries at his company's site mirrors deeper economic trends. Job-related searches are up as a share of total searches, for instance, and real-estate and luxury goods searches are down--exactly what you'd expect in a "recessionary environment," Varian said.

But overall, the total number of searches on any topic continues to grow "very dramatically" from year to year, and e-commerce sales also continue to climb, Varian said.

"The lesson you learn from looking at query patterns on Google is, yes, we're seeing an economic slowdown, but no, that's not an Internet slowdown," said Varian, who admitted that his day job focuses on a more microeconomic task: the economics of Google's advertising auctions. "The Internet is still looking pretty strong, compared to most of these other sectors."

According to the latest U.S. Census Bureau figures, e-commerce sales have experienced a steady uptick since the turn of the century, estimated at $136.4 billion in 2007--an increase of 19.0 percent over 2006.

Other panelists were similarly optimistic. Edwin Garrubbo, chairman of the Electronic Retailing Association, which represents direct marketers, cited Forrester Research statistics estimating that e-commerce sales will surpass $200 billion this year and hit $300 billion by 2011, with double-digit growth each year in between.

To be sure, online sales still account for only a fraction of total retail sales--about 3.4 percent in 2007, up from 2.6 percent in 2006, according to the Census Bureau. Saks Fifth Avenue, for instance, currently does the largest volume of its sales at its flagship Manhattan store, but its online counterpart ranks second by that metric, and Garrubbo predicted that "it's only a matter of time before the potential for that online business is going to far exceed New York's"--and eventually that of "all of its other stores combined."

In the venture capital world, investing is down about 10 percent overall from last year, and the number of early-stage companies has dropped more significantly, but that's not necessarily a sign of trouble, suggested Michael Avon, a principal investor at Columbia Capital. After all, last year's investment numbers were the highest since 2002 or 2003, he said.

"Anecdotally, in the Internet, I think we're seeing more good opportunities now than six months ago," said Avon, whose portfolio includes Internet, digital media, and enterprise software firms.

In the firms he manages, "we haven't seen significant pullback yet in ad spending or in consumer spending on digital goods," though he acknowledged seeing some of the "froth" being skimmed off of deals.

His statements seem consistent with a recent report by Dow Jones VentureSource and Ernst & Young, which found that while venture capital dollars are scarcer overall, companies focusing on communications, electronics, information services, semiconductors, and software actually took in a total of $3.88 billion in the first quarter of 2008, marking a 20 percent gain year over year.

Even so, it's clear that at least some smaller companies at the Web 2.0 summit in San Francisco this week are opting to proceed cautiously, as CNET News.com reported Friday.

Avon, for his part, said he advises start-up firms to be "incredibly careful with cash," since many a promising company has failed for misjudging its cash needs, and to try to experiment with multiple sources of revenue--not banking entirely on advertising, for instance.

Robert Atkinson, president of a think tank called the Information Technology and Innovation Foundation, argued that information technology is such a major economic driver that, since 1995, it has enabled the U.S. economy to be $2 trillion larger than it would be, absent technology.

"There's absolutely no evidence that somehow, we're at the end of the IT revolution," Atkinson said, adding, "I think we've got a minimum of 10 or 15 years, maybe a lot longer."