Joe W., Ene talks...
October 30, 2000, Issue: 835
Section: INDUSTRIES
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BROADENING INTO BROADBAND
ROBERT PRESTON & MIKE KOLLER
Enron Broadband's deal with Blockbuster will prove it's a player, says CEO Kenneth Rice.
Enron Corp. got into the telecom business almost by accident. Portland General Electric, a utility Enron acquired in 1997, was building a fiber-optic ring around that city and planning some long-haul telecom projects just as Enron was looking for new businesses in which it could apply its trading model.
Enron saw similarities between telecom and electricity: Customers would generally sign long-term contracts with providers, but then they would use only a small fraction of the capacity they bought.
"There was no mechanism to create efficiencies of buying and selling the commodity and utilizing that excess capacity," says Kenneth Rice, CEO of Enron Broadband Services. "That's a market opportunity."
In fact, Enron executives think telecommunications could generate more profits than its core energy interests within a few years. Chairman Ken Lay recently said the company plans to spend $600 million to $650 million a year over the next few years on the business, which encompasses trading and provisioning bandwidth and delivering broadband content.
Enron is now laying the groundwork: a 15,000-mile fiber-optic network connecting the 40 largest cities in the United States, with "pooling points" at strategic locations to switch bandwidth from third parties on or off.
The company has completed four pooling points-in New York, Los Angeles, Las Vegas and London-and plans to build nine more. Enron will manage that infrastructure using hundreds of high-capacity Sun servers deployed on the edges of the network.
Enron Broadband's latest customer, software developer i2 Technologies, is tapping the Enron unit for bandwidth to connect its Dallas headquarters and operations in New Jersey, Japan, Belgium and India. The three-year agreement covers a fixed amount of capacity and the option to expand service on demand by a factor of 10.
Why go with Enron? I2 cited the company's "high-quality solution" and ability to provide network access "in areas of the world where we have had difficulty gaining connectivity."
Enron's stated goal is to reduce the time it takes to provision a circuit from months to 10 minutes or less-a capability it admits is still a year or two away. But the company is adamant that it will turn the traditional carrier business model on its ear.
A common misconception is that Enron is selling capacity on fibers strung along its gas pipelines. "Everybody thinks that, because then they say, 'Oh, OK, now we understand why a pipeline company is going into the telecom business.' " says Enron president Jeff Skilling. "But we are a B2B company that extended the marketplace into telecommunications. The pipes had nothing to do with it. It was a business model, a way of thinking about markets, that really mattered."
Will Content be King?
The second prong of Enron's telecom strategy centers on delivering high-bandwidth applications to customers over its network.
Enron Broadband has signed scores of deals to deliver video for content providers, including Web FN and Road-Show.com, but its 20-year movie-on-demand joint venture with Blockbuster Inc. is the most ambitious.
Blockbuster brings its brand name, 65 million customers and relationships with movie studios. Enron is responsible for encoding and storing the movies, streaming them over its broadband network and ultimately delivering them at a guaranteed service quality via last-mile carrier partners (including Covad, Quest, SBC and Verizon) to homes nationwide.
When the service is rolled out commercially in the second half of 2001, customers will be able to log on to a Blockbuster Web interface, select from 500 movies, pay with a credit card and download a movie onto a set-top box. The process will typically take no more than 30 seconds-like renting a movie without the trip to the store or the late charges, Rice says. Customers can even rewind, but they can't make copies.
Rice says customers will buy their DSL (or cable modem) service from the distribution partners, or eventually get the service and set-top box from Blockbuster itself.
In a six-month trial due to be launched in New York, Portland, Salt Lake City and Seattle in December, the partners will gauge which movies customers like, how long they want to rent them and how much they're willing to pay for a movie and a set-top box.
Video-on-demand trials in the United States and abroad have been a flop, either because the technology hasn't worked or delivery has been too expensive. Now, with affordable broadband Internet connections to customer homes and lower set-top box and storage costs, it's much cheaper to provide this service, Rice says.
Meantime, Enron thinks it has a better commercial model.
The typical structure of such a joint venture would have been for a network service provider to quote Blockbuster a huge up-front fee to prep its network to deliver the service, Rice says. In contrast, Enron is taking a piece of each movie rented-so its interests are aligned with Blockbuster's.
Tom Nolle, president of communications consultancy Cimi Corp., likes Enron's prospects in content networking far more than in circuit provisioning.
"Content networking is potentially a $200 billion a year business," Nolle says, "and the majority of that could be realized in the near term. There are no incumbent players in this space. If you're going to buy a Blockbuster movie, you're judging the content of the movie-screw communications."
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