Juiced

Wall Street analysts and oil industry executives were thick among the legion of skeptics who thought Enron Corp. President and Chief Operating Officer Jeff Skilling was nuts to launch a Web site for the trading of natural gas and electricity over the Internet.

That was last November, before EnronOnline locked up more than $120 billion in transactions in its first few months of operation, quickly establishing itself as the world's largest e-commerce company. As of Oct. 11, just prior to Enron's report of its third-quarter earnings, EnronOnline had executed more than 350,000 transactions, representing a gross value of $183 billion.

Since then, the $40 billion Houston-based energy giant has elbowed its way into several new diversified markets. And it plans to continue its push into many more, ranging from railcar cargo space to broadband networking and data-storage capacity.

In doing so, Enron is turbocharging its transformation from a stodgy, old-line fuel company to an entirely new kind of business-to-business market maker, with information technology and an all-out emphasis on entrepreneurship at the heart of its New Economy operations. Enron has been so successful in leveraging IT to pioneer new markets that others are trying to emulate its approach.

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First to Market

"Enron often introduces a product before the competition even senses a market exists," the company says in its latest annual report. A prime example: online trading of data-network capacity.

Indeed, "there's a low degree of awareness [among carriers] about the bandwidth-trading business," and Enron is ahead of the game, says Seth Libby, an analyst at The Yankee Group in Boston.

At present, there are only a handful of network professionals who are aware of these capacity commoditization plans, says Libby. But not for long, asserts Enron President?? Jeff Skilling. "Within five years, the bandwidth market may be bigger than the gas and electric markets," he says. "So for us, it could be as big as the rest of our existing energy business." That's currently a $35 billion business.

But critics say trading bandwidth is much more complicated than trading gas, especially for a company with little depth in telecommunications. And critics add that although carriers stand to benefit from the ability to buy and sell capacity, they might prefer to do it through some channel that's independent of the control of a single market maker like Enron.

"Enron's argument is that its trading capabilities are the differentiator, and that it need not have deep telecom expertise," says Lisa Pierce, an analyst at Giga Information Group in Stamford, Conn. "But I'm not convinced it's that simple. Technology isn't a long-term competitive differentiator."

Houston-based Enron Broadband Services Inc., formed last year, offers IP transport on its 15,000-mile fiber-optic network. Enron Broadband Services also trades—that is, makes a market by buying and selling—network capacity to and from other data carriers, conducting some of the transactions on EnronOnline.

Enron Broadband Services also offers content-oriented services, such as a video-on-demand service it will market with Dallas-based Blockbuster Inc. to home viewers starting next month.

"When we started the gas business, they told us we were nuts," Skilling says. "They said, 'You're going to sell gas but not own production? How does that work?' Then we did electricity and they said we were nuts again, and even louder than before. They said this stuff moves at the speed of light; you can never create a market. Then in telecommunications, they said we were nuts again."

Despite its share of skeptics, some experts like Enron's prospects in this space. "I think aspects of this have the potential to be very big," says Libby. "The carriers like the idea of instantaneous provisioning. And I think it has a lot of potential [for] . . . selling it to businesses and giving them the ability to cut their costs significantly by buying it as they need it."

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"We aspire to that kind of model," says Fred Buehler, director of electronic business at Eastman Chemical Co. in Kingsport, Tenn.

"In every sector, there will be one or two innovators who get out front and do things differently to create shareholder value," Buehler says. "We're trying to be one of them."

Market Maker

Stroll through the gas-trading section on the 32nd floor of Enron's glistening 50-story headquarters, and the company's technological sophistication is immediately evident. Traders like 26-year-old John Arnold, who personally executes about $1 billion per day in trades, have real-time access to virtually any information that might affect their split-second buy-and-sell decisions.

That information might be a meteorologist's prediction of a colder-than-normal winter across the Plains states or a live news report of political instability in an oil-producing country in the Middle East.

Behind the scenes, all of Arnold's trades are instantly analyzed and processed by a sophisticated, proprietary risk-management system and then updated across multiple back-end computer systems worldwide. Less than a year after launching the operation, 60% of the world's gas is traded on EnronOnline.

"What we are doing, no one in the industry did 10 years ago. Eighty percent of our income this year is from businesses that didn't exist 10 years ago," says Skilling.

For example, EnronOnline contributed heavily to its parent company's third-quarter earnings, which were up 31% to $292 million, compared with the same period last year.

"The change is technology-driven," Skilling adds. "We couldn't do what we do without massive amounts of computing capability." In this regard, Enron joins a short list of companies that includes Wal-Mart Stores Inc., FedEx Corp. and American Airlines Inc., which famously pioneered various mission-critical IT techniques to leapfrog competitors and create a whole new class of IT-enabled industry leaders.

Among Enron's boldest ideas is its use of a single, powerful software-based trading platform to insert itself as a principal buyer or seller in hundreds of different markets. Currently, Enron trades more than 1,000 different commodities, such as gold, natural gas and metals, on EnronOnline.

"The core of our business is our business model, which is a centralized risk-management and market-making business model. It just so happens that the Internet is just perfect for improving the efficiency of that model," Skilling says.

But as a market maker, EnronOnline stands alone. For starters, unlike most other Internet marketplaces, it's free. There are no transaction fees or catalog, inventory or subscription costs for users.

"Enron has broken away from the pack in the last year, in terms of their capital growth," says Ian Wylie, vice president of e-business at BP Amoco PLC in London. "And e-business is responsible for a lot of this change."

Even more unusual is Enron's role as a principal in each transaction. That means Enron is either the buyer or seller in every trade in which it's involved, unlike market makers that simply act as matchmakers between buyers and sellers.

In fact, Skilling, as well as Mike McConnell, who heads EnronOnline's global expansion efforts as president and CEO of Enron Global Markets LLC, dismisses much of the current hyperactivity surrounding other fee-based business-to-business exchanges as a flash in the pan.

"[Many of the] B2B guys think all you have to do is set up a bulletin board and people will start transacting, but it doesn't work that way," Skilling says. "You need to know you can deliver if push comes to shove."

As either the seller or buyer in all of its trades, Enron, an established brand name with 32,000 miles of pipeline and deep financial pockets, guarantees delivery or payment on all trades that are executed on EnronOnline.

"We're creating markets that were highly illiquid, so someone has to put their reputation on the line to say, 'We'll deliver,' " Skilling says.

But guaranteeing delivery also requires having guaranteed access to physical assets such as network bandwidth and papermaking plants. Guaranteed access also ensures marketplace liquidity. For Enron, this is where the bricks and mortar come in.

For example, to help drive its liquidity in the pulp and paper market, Enron paid $72 million in July for Garden State Paper Co., a recycled-newsprint mill in Garfield, N.J.

Skilling's current market fancy is metals, and in May, Enron bought MG PLC, a London-based metals marketer. "You have to break the liquidity logjam, and to do that, you have to take a risk position," Skilling says.

But once the logjam is cleared, Enron is just as likely to sell off the brick-and-mortar assets it acquired and use the cash to invest in new business.

For example, to finance its new bandwidth-trading operation, Enron is selling Portland General Electric Co., a Portland, Ore.-based power producer that it bought in 1997, so it could bring liquidity to and guarantee trades in the online electricity market.

Eventually, Enron may end up trading commodities that aren't even considered commodities—at least not at the moment—such as data storage capacity or empty railcar space.

"Might we move into sauces or meats or grains? Potentially," says McConnell, who was Enron's de facto CIO before moving into his current role.

"You have to be creative every day," McConnell says. "You have to be open-minded to trying new things."

But what remains constant throughout all the upsizing and downsizing is Enron's core IT-enabled business model, which is what puts it in a class of its own, analysts say.

"People have talked a lot about systems that they're about to roll out, but there is just not much out there for direct trading," says Mike Heim, an energy analyst at A.G. Edwards & Sons Inc. in St. Louis. "Enron rolled out its technology 10 months ago, and still there isn't much else out there. There hasn't been much competition [because] there isn't anybody in the same class."

But just last month, Houston-based Dynegy Inc. launched Dynegydirect, an Internet-based, commission-free trading site for energy and communications commodities.

Also last month, IntercontinentalExchange in Atlanta, whose partners include BP Amoco and The Hague-based Royal Dutch/Shell Group, added natural gas and power to its online trading system, which already included precious metals and crude oil.

Skilling doesn't get called "nuts" much anymore. In fact, he's a darling on Wall Street, where Enron's stock has soared from around $40 per share last November to $81 as of this Nov. 2. As a result, Enron—by all accounts, an Old Economy gas pipeline company until 12 months ago—is widely regarded as a New Economy pioneer.

Says Skilling, "We like to say we were B2B before there was B2B."

Thriving On the Unconventional

As head of two Enron pipeline subsidiaries, Mike McConnell knew a lot more about gas flows than he did about data flows last year when he got a surprise call from Enron President and Chief Operating Officer Jeff Skilling.

Recalls McConnell, "Jeff went into this whole thought process about how the Internet is changing everything. He said, 'We need to make Enron an e-business, and I need a guy that can run this as a business. We need to change the way we view technology.'

"I thought he was a little crazy and I said, 'Jeff, I'm not a technology person at all,' He said, 'No, seriously—this is going to be big.' So I took over as CEO of Enron Global Technology," and thus became the company's de facto CIO, McConnell explains.

Appointing a person with no technology background to the top IT post is an unusual move. But Enron often defies convention and typically thrives as a result. Indeed, Enron boasts an entrepreneurial culture that's unusual in large, long-established companies, and in utilities firms in particular.

McConnell relates the tale of how 29-year-old Louise Kitchen, Enron's head gas trader in Europe, spearheaded the creation of an online gas-trading system, recruiting IT people from elsewhere in the company to do the development work. Word of the Web-based platform, EnronOnline, which is literally remaking the company, didn't reach top management until a few weeks before it went live.

Kitchen enlisted the support of Enron's initially skeptical top traders, and she scoured the company for software developers and other experts. Her small army of volunteers worked nights and weekends on the project while carrying on with their regular jobs.

"It's an amazing story about not getting corporate approval and going through all the bureaucracy," McConnell says. "No one went to the board and said, 'We want to change the way we trade.' You just do it."

Glowing Endorsement

Soon after McConnell became the de facto CIO of the $40 billion energy company, he joined eight of Sun Microsystems Inc.'s top Houston customers at a breakfast hosted by Sun CEO Scott McNealy.

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By the Numbers
Enron Corp.
  • Headquarters:

    Houston
  • 1999 revenue:

    $40 billion
  • 1999 net income:

    $893 million
  • 1999 employees:

    17,900
  • Fortune 500 rank: 18

EnronOnline

  • Transactions for 2000, as of mid-October: 352,000
  • Value: $183 billion

Source: Enron Corp., Hoover’s Online
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