ne of the many far-reaching promises of the Internet is that the global neural system of modems, servers and fiber-optic cable has liberated individuals from geographical shackles. After all, the Internet allows a store in New Britain, Connecticut, to sell books to customers in Great Britain, a tour guide in Nepal to pitch customers in Nebraska, and a magazine editor in a New York apartment building to swap files with a magazine designer in New Orleans.

Today, in theory, participants in the digital economy can do business from anywhere. But in the Information Age, many businesses are finding that location not only still matters – it matters even more. Last fall, I spent some time at Lincoln-Mercury’s new headquarters in Irvine, California. The executives rhapsodized about how leaving their historic home of Detroit and joining the burgeoning car-design center in Southern California had rejuvenated the organization.

Personal-computer maker Gate-way 2000 is the prototypical New Economy company. Ted Waitt and Mike Hammond started Gateway in 1985 in an Iowa farmhouse and moved the business north to North Sioux City, South Dakota. The company made a virtue of its remote location, taking advantage of low labor and real-estate costs to get a leg up on competitors. But Gateway quickly outgrew its prairie digs. By 1998, it had 14,000 employees and sales of $7.5 billion. And its founders realized that this Fortune 500 company needed to be somewhere else to attract seasoned executives. So in 1998, Gateway moved its administrative headquarters to San Diego.

For an increasing number of companies like Gateway, cities have become more appealing. During the Old Economy recession of the 1990s, the downtown areas of New York, San Francisco, and Los Angeles were written off as obsolete ghost-towns. But in the past several years, each has come roaring back, creating hundreds of thousands of new jobs. And in an unexpected twist, cities like New York have become among the biggest beneficiaries of the digital economy.

Many observers have noted and chronicled the growth of New York’s Silicon Alley. As a result, local readers are probably conversant with the “whos” and “wheres” of New York’s digital epicenter. But until now, nobody has attempted to account for the “how” and “why.” And that makes Theresa Lant’s piece on the rise of Silicon Alley (p. 9) a perfect centerpiece for this issue. Lant weaves together the trends in technology, politics, and the local economy with the career arcs of individual players. The end result is a compelling narrative that explains the unexpected rise of a thriving and prosperous Silicon Alley from the gloom of the downtown recession of the early 1990s.

ne of the trends that continues to propel the digital economy forward has been the belated but steady move by established firms onto the Internet. Metropolitan areas have also benefited from this trend. New York-based bookseller Barnes & Noble, for example, begat New York-based online bookseller Barnesandnoble.com. Toys’r’Us, based in suburban New Jersey, spawned Fort Lee, N.J.-based toysrus.com. And it made perfect sense for Donaldson, Lufkin, & Jenrette to base its online offering, DLJDirect.com, in Jersey City and New York. Marshall Loeb’s insightful interview with DLJDirect CEO Blake Darcy (p. 4) brings to light the challenges and opportunities established Wall Street firms face when confronting the Internet.

nitially, many observers felt the growth of online commerce would be a threat to cities like New York. After all, New York is, among other things, the retail capital of the world. Millions of shoppers annually flood into the city’s department stores and boutiques in search of bargains and hard-to-find goods. The rise of online retailers threatened to disintermediate stores, from Armani to Zegna. And analysts and researchers hastened to issue hyperbolic predictions. In his timely piece, Joel Steckel (p. 22) looks into the origins of today’s wildly disparate predictions about e-commerce, and (politely) asks forecasters to show us the methodology!

These days, as online retail pioneers like eToys and Amazon.com continue to pile up losses, e-tailing has fallen out of favor. The original Internet business model of selling low-margin goods seems to be on the outs, at least temporarily. Online retailers had also justified such aggressive spending as necessary to build a lasting brand. But it is important for investors to consider that brands may not always stand the test of time. In his useful study (p. 31), Peter Golder digs into history to suggest why some leading brands survive for decades and why others don’t.

Online retailers have been replaced in the media and investors’ imagination by digital newcomers like business-to-business firms, or on-line application service providers. And next year, the pages of Business Week and Fortune will probably be filled with talk of entirely new modes of doing business. That’s why we thought it would be useful to sit down for a chat with Christopher Tucci, the co-author of a new text- book on Internet business strategy (p. 16). He provides some suggestions for considering what types of companies will make it here, and which may not.

One of the downsides of the rebirth of many American cities has been the concurrent growth in traffic. In urban areas like Atlanta, Los Angeles, and Washington, and, yes, New York, hour-long commutes have become commonplace. Many companies have sought to battle the scourge of traffic by having employees work from remote locations. But this poses challenges. And as Roger Dunbar and Ragu Garud note in their forward-looking essay (p. 18), this new mode of working – “telework” – promises to transform corporate culture.

To a degree, all of us have become teleworkers. Cell phones, the Internet, and wireless devices now link us to our offices, and to one another, regardless of our location. As a result, executives in all types of businesses are being forced to consider, and reconsider, the physical location of their headquarters.

hus far, the digital economy has been a boon to cities. I believe it will continue to be. These days, you can start and run a business anywhere. But if you want the enterprise to live to its full potential, you might have to physically move it to a place where it can tap into the best resources: technological, financial and human. And today, the richest deposits of these resources typically can be found in large cities.

Daniel Gross is editor of Sternbusiness.