• by Diane Mermigas , March 10, 2008

A funny thing is happening on the way to the recession. Innovation and e-commerce are looking impervious to economic ravages, at least, for now.

While retail store sales continue to take a hit, e-commerce continues to thrive. Car production pulls back, but iPhone production can't keep up with consumer demand. The market for tech innovation and mobile interactivity has a relevance that outweighs recessionary concerns. The companies and industry sectors that demonstrate an edge in seizing on those growth trends will probably thrive in any economic climate.

Online retails are growing three to four times faster than conventional retail, defying concerns that the slowdown in domestic consumer spending will take a toll in that sector. "It seems the opposite is true"--especially for leading online retailers such as Amazon, according to Bernstein analyst Jeffrey Lindsay. "Online retail is likely to show a high degree of recession resistance compared with offline."

The growth in U.S. unique visitors to online commerce sites rose 7% in January from the year-earlier period. Page views rose 3%, and time spent on e-commerce sites rose 4%. Most astounding is that each percent of retail commerce that switches online in the U.S. constitutes about $10 billion in online sales. To date, nearly 4% of total U.S. retail sales, or $42 billion, have moved online. Online retail growth is averaging 21% so far this year, compared with 5.4% growth for offline retail. Lindsay expects domestic online retail to grow 17.5% in 2008 overall, down slightly from 2007.

This momentum is good for the long haul. Users continue growing 3% domestically and 8.3% globally. Broadband connectivity continues to grow, and is expected to reach 94% in the U.S. by 2011. Less tangible --but just as meaningful--is the greater availability and selection of goods online, as well as growing consumer confidence in such transactions.

Consumer electronics is one of the fastest-growing online retail sales categories, growing 75.4% year-over-year, or about 10% of all online retail sales. The only categories growing faster are photo services, jewelry and watches, toys and games, and hobbies.

That explains why Amazon, with its recent aggressive category expansion, is now fueling its forecast 26% to 34% revenue growth in 2008. Order size and third-party sales are up even though the economy is down. What revenue problems it can't solve at home (with competition from Walmart.com and many pure-play specialty online retailers), Amazon can solve by ramping up overseas business, Lindsay says. Amazon also will continue to cater to consumers' zeal for all things digital. It may launch other new services akin to its new DRM-free music downloads in direct competition to Apple's iTunes.

Those are essentially the same marketplace sensibilities driving Apple. The company's entire MO is satisfying insatiable consumer demand for ultra-simple, integrated, connected mobile devices anchored by iPhone, iPod and Macs. The U.S. consumer may be out of credit, out of work and out of a house, but Apple will still sell 10 million iPhones this year, partly as a compelling alternative to long-time market leader BlackBerry. (The glaring void remains the 3G applications that will make iPhone competitive with mobile phones in the rest of the world.)

Steve Jobs was joined onstage at Apple's March 6 event by John Doerr, partner at Kleiner Perkins Caufield & Byers, which has financed many computer and Internet companies, including Amazon.com and Google. The venture-capital firm announced the $100 million iFund to invest in iPhone software development start-ups. The impetus is supporting iPhone's development as an interactive mobile device that has the potential to be "bigger than the personal computer," he said.

The latest Pew Internet report indicates that 62% of all Americans have "on the go" dependence on Internet-connected cell phones, PDAs and other mobile devices with access to digital data, Internet tools and e-commerce. More functional, powerful cell phones with bigger, crisper screens and easy keypads--supported by an $11 billion mobile ad business by decade's end--are on their way to becoming the universal digital media player of choice, with Apple leading the pack.

Still, Apple and Amazon are among the companies that straddle technology, media, Internet and retail sectors that were falling out of favor with investors even before the negative economic news. Few business sectors--save utilities and basic living necessities--are truly recession-proof. It would be difficult to pick winners based on stock price in today's volatile markets. Apple and Amazon shares, like most of tech and the Internet, are down by double digits this year.

So it is a more reasonable and accurate measure of potential to comparatively assess the fundamental growth trends of companies, industries, consumers and advertisers. Simply put, Apple and Amazon are in the sweet spot of a digital revolution. And as long as they can continue to meet the exploding demand for more high-performance connections and convenience, they will propel past the cares of a tested economy.