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Tech Industry

Some dot-coms fleeing Valley for cheaper pastures

Silicon Valley may be the epicenter of the Internet revolution, but the costly real estate is prompting some struggling dot-coms to locate elsewhere to cut costs.

Silicon Valley may be the epicenter of the Internet revolution, but the costly real estate is prompting some struggling dot-coms to locate elsewhere to cut costs.

Several companies have recently announced they are moving some or all of their operations out of the area, which many now consider to be the stretch between San Jose, Calif., and San Francisco.

Egghead said yesterday it was moving 20 percent of its Menlo Park-based staff to Washington state. PlanetRx said earlier this week that it was moving its South San Francisco headquarters to Memphis, Tenn.

"The difference in the cost of rent is pretty dramatic," said Greg Jones, a spokesman for InsWeb, another Silicon Valley company that is moving out. It was simply a matter of comparing the going rates of about $7 a square foot in the San Francisco Bay Area to the more realistic $1.60 a square foot rate that is found in Sacramento, Calif.

"For us, moving makes sense," Jones said.

PlanetRx chief executive Michael Beindorff said the company's lease in Tennessee will cost about 60 percent less than what it was paying in South San Francisco.

The frugality comes as dot-coms are trying to cut costs and show profitability in the wake of the April stock market downturn. But while a move could mean cheaper rents and access to cheaper labor, it may be hard to attract top tech talent in remote places, analysts say.

"Retaining and attracting talent is everything in information-based businesses," said Genni Combes, senior analyst for Chase Hambrecht & Quist. "The benefit of moving is that employees can afford houses and live in more affordable neighborhoods. The negative is that some families are unable to move."

Relocating can be jarring for companies, Combes added. Some have seen their valued employees decide to leave instead of move. For example, a staff exodus hit entertainment company Blockbuster when it moved to Texas several years ago, and apparel company The North Face experienced the same thing when it moved to Colorado, Combes said.

But for Redwood City, Calif.-based InsWeb, the trip is not that far: Sacramento is only 90 miles away. Plus, the cost of living is lower, and there are dozens of insurance and technology companies in the area, Jones said. Of the company's 100 workers, about 75 said they will stay on after the move.

In Egghead's case, the company said it plans to relocate 13 of the 46 workers affected by the move and fill the remaining positions with workers from Vancouver, Wash. Because the cost of living is cheaper there, the company would reduce its salary and relocation costs, said Egghead spokeswoman Joanne Hartzell.

Hartzell added that because there are fewer tech companies in Vancouver, Egghead can worry less about having its top people lured away.

All of the companies described moving as an effort to save money. All three have fallen on hard times of late. PlanetRx laid off 70 workers, saw its chairman resign and watched its stock fall below $1. The company is fighting to lift its share price to avoid having its listing removed from the Nasdaq.

Egghead has also seen its stock plummet amid news that the company is mired in financial problems. And InsWeb, which links consumers to insurance companies, is trying to rebound after behemoth insurer State Farm cut ties with the company.

With all the benefits of leaving the so-called high-tech capital for cheaper rents, most of the companies said it was important to keep at least one foot in Silicon Valley.

"Our vendors and partners are here. It makes sense for us to keep a presence here," Hartzell said. "If you're an Internet firm, this is still the place to do business."