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Business
Enron Plays The Pipes This old-time gas company is trading fuel for a future 
as a new-economy
superpower. Will the swap work?
Frank Gibney Jr./Houston

08/28/2000
Time Magazine
Time Inc.
38+
(Copyright 2000)

It's Saturday night, and the only thing between you and a movie from 
Blockbuster Video is the unpaid late fee for
last week's rental. If that sounds familiar, then you'll appreciate this: 
next year Blockbuster plans to offer up to 500
movie titles online in more than a dozen major cities around the U.S. That's 
right, video on demand (not the
frustrating no-rewind, no-pause pay-per-view offerings of today) for anyone 
with a DSL line at home. 

What's remarkable is that Blockbuster's partner happens to be an energy 
company called Enron. At a time when
so many old-economy companies seem helpless against the dizzying pace and 
technology of the digital age,
Enron is demonstrating why FORTUNE magazine keeps voting it the most 
innovative large company in America.
For years the Houston-based firm simply produced, transported and marketed 
natural gas. Then, as energy
deregulation threatened profit margins in the gas business, Enron discovered 
it could make billions by trading and
brokering packages of energy the way Midwesterners do pork bellies. Now Enron 
is moving into the
telecommunications business, with a national fiber-optic cable network and a 
floor bulging with Sun
supercomputers.

In fact, Enron may be the most interesting old-economy company around. Since 
moving its trading operations from
the phone to the Web eight months ago, the company has doubled revenues to 
more than $30 billion. Most of that
is made through trading everything from energy and paper to weather risk 
derivatives and now bandwidth--more than
800 offerings in all. Think of eBay, but instead of auctioning $5 used Baby 
Gap pajamas, the company trades
$600,000 blocks of natural gas--and pockets commensurately huge commissions. 
Boasts Enron president Jeffrey
Skilling: "In terms of dollars transacted, we're the world's largest online 
site by a factor of 10." 

So far this year, that has meant $120 billion in transactions. And when 
you're running the network, all sorts of
profitable opportunities arise. Last week, when word spread that natural-gas 
prices would spike this winter, Enron's
in-house traders saw their gains surge as customers raced to lock in future 
supplies at today's prices. And Enron's
stock price? It hit $90 last week, tripling its value of a year ago. Kind of 
like an Internet play, only better. 

The market loves Enron because Skilling and CEO Kenneth Lay seem to have come 
up with a business model that
works for just about anything. They provide a service to their customers by 
packaging a supply of name your
commodity and then using the efficiency of their vast network to beat most 
prices. They arrived at this model back
in the mid-1980s almost out of desperation, when crude-oil prices had 
collapsed, natural-gas deregulation had
thrown that market into chaos, and the Peruvian government had just 
nationalized Enron's offshore properties.
Figuring they might as well leverage deregulation instead of succumbing to 
it--call it business judo-- Skilling, a
McKinsey & Co. consultant at the time, came up with a plan called the Gas 
Bank, to buy up reserves of natural
gas, then package them for sale, with various prices and conditions for 
different customers. When electricity
markets deregulated a few years ago, the company did the same. It's the 
oldest concept in business: buy low, sell
high. 

Enron also leverages its assets and expertise to provide services to big 
customers. Since 1997, companies like
Owens Corning and Chase Manhattan Bank have signed long-term, 
multibillion-dollar contracts with Enron
subsidiary Enron Energy Services (EES) that lock in their energy costs for up 
to 10 years and provide Enron with a
steady revenue stream. What's more, Enron is beginning to actively manage its 
clients' heating and cooling plants,
installing new equipment when necessary and monitoring it all over the 
Internet. 

Skilling's latest gambit is to apply the same principles he learned in the 
power and energy sectors to making Enron
a leader in the booming telecommunications business. The plan isn't to go 
head to head with established fiber-optic
carriers such as AT&T, Qwest and Williams Communications. Instead, Enron 
wants to use new switching
technology and its expertise in trading pipeline access to transform a modest 
telecom network into a powerful
arbiter of bandwidth. Enron's bet is simple: supply and demand will increase 
exponentially, turning bandwidth into a
tradable commodity, just like gas and electricity. Along the way, why not 
partner with companies such as
Blockbuster and use this new technology to offer content--like movies- -and 
blow it through existing, underutilized
pipe? "They are jump- starting an application [telecom content] with a 
potential market of $200 billion a year," says
Tom Nolle, president of the telecom consulting firm CIMI. 

Other new-economy players are also beginning to see the power merchant as a 
prize partner. IBM and AOL have
joined with Enron to form the New Power Co. (TNPC), an independent start-up 
that will offer pricing schemes and a
choice of power and gas service for residential and small-business customers. 
Enron provides the electricity; AOL
enables customers to buy it via the Web; and IBM takes care of the billing. 
"It's ludicrous that we're in the 21st
century, and you still have people jumping over fences to read meters," says 
Skilling, pointing out that the
technology exists to offer real-time pricing for gas and electricity. In 
deregulated markets, TNPC will allow
consumers to switch power companies as easily as they do phone companies. 

Despite all Wall Street's enthusiasm for Enron's bold plans, there are still 
plenty of skeptics. Critics point out that
there is barely a market today for the company's bandwidth trading exchange. 
They also stress that pushing digital
signals through pipe is a world away from routing natural gas. Although there 
is plenty of cable across the country,
carriers are not set up to mix and match access to it. "It's a very, very 
difficult concept," says Nolles. Even the
Blockbuster venture is risky: technology aside, there is also the highly 
political question of digital rights. How do
you satisfy Hollywood that its content is secure? 

But Skilling and his lieutenants are quick to counter that everyone thought 
they were crazy to try to make markets
in gas and electricity. And Enron, after all, is a company that thrives on 
entrepreneurial defiance of convention.
Many of its new ventures were started because managers simply set new ideas 
in motion without waiting for
approval from the top. Even the online operation was cobbled together in a 
mere seven months. Skilling and Lay
found out about EnronOnline only two weeks before it went live. 

Is taking risks really a part of a gas-pipeline company's culture? Just ask 
John Arnold, the 26-year-old chief of
natural-gas derivatives, who after nine hours and $1 billion in trades last 
Wednesday had this to say: "You can't turn
away for a minute or you get picked off." That has happened to too many 
traditional companies because they were
unable to find a niche in the new economy. Enron, however, has traded its way 
into a starring role, and now it
hopes it is ready for the movies. 

[BOX] 

THE PIPELINE OF PLENTY --Natural-gas production --Electric-power generation 
--Enron Online: global-trading
system for 800 commodity products; $120 billion in trades so far in 2000 
--Enron Energy Services: contracts with
institutional customers to manage all power needs at fixed, long-term prices. 
Ultimate aim is control, via the Web,
of heating, ventilation and air conditioning --Enron Broadband Services: 
trades bandwidth capacity to fill customers'
transmission needs. Offers bandwidth to content providers like Blockbuster 
and AtomFilms.com


COLOR PHOTO: GREG GIRARD--CONTACT PRESS IMAGES THE KING OF REINVENTION 
Desperate conditions
in the '80s forced Enron's president Skilling to come up with a new and 
highly adaptable business model COLOR
PHOTO: PAUL S. HOWELL--LIAISON AGENCY FOR TIME POWER MERCHANT Even as it 
trades commodities
from coal to bandwidth, Enron continues to expand its gas and electric 
production around the globe COLOR
ILLUSTRATION: ILLUSTRATION FOR TIME BY BILL SCHWARTZ



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