New York is the place to be :)
I live in New York even though I work on the Internet. That decision has always been for personal reasons. To maximize business opportunities, I should arguably be in San Francisco.
However, it seems that New York is going through an Internet revival with the ever growing number of events: Tech Meetup, Lunch 2.0, The Founders Roundtable, etc. and the emergence of Silicon Alley Insider (www.alleyinsider.com).
Silicon Alley Insider was created by Kevin Ryan and Dwight Merriman of DoubleClick fame. It covers the New York digital business community and is becoming increasingly influential. Its Silicon Alley 100 report on the 100 most influential people in the digital community in New York has been generating a lot of buzz (www.alleyinsider.com/sa100/).