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As a result, most of the Houston-based company's profits come from businesses that didn't even exist when Skilling, a former McKinsey & Co. consultant, joined in 1990. Now, Skilling and CEO Kenneth Lay are harnessing the Web to bring Enron's market-making and risk-management prowess to other businesses, including bandwidth. Since its inception late last year, EnronOnline has traded more than $85 billion worth of commodities, making it one of the Web's biggest e-commerce sites. Skilling recently spoke with Dallas Bureau Chief Wendy Zellner about his Net strategies. Edited excerpts of their conversation follow. Q: How does the Net help Enron transform itself yet again? A: People paint us as an Old Economy company that's [now] New Economy. But we in fact put in place a business model as this business deregulated that really was a New Economy model.... For the first time customers weren't forced to take a single product from a monopoly provider. Customers...could say, "Here's what I need." What we thought was important was to be able to respond to that need and to be able to very quickly assemble the components of whatever that package was and provide it to the customer.... You have to be able to source the lowest-cost components that you're packaging.... It just so happens that that model is almost uniquely amenable to [being overlaid on] an Internet transaction system.... All it's doing is taking what was a radical business model for the industry and making it a lot better. Q: How does it make it better? A: You can create additional liquidity. One of the key things in sourcing is you want access to the lowest-cost components.... You want the ability to very quickly be able to source large volumes of some components if that's what the customer wants.... Our volumes are so much higher and our access to other people for instantaneous business is magnified by a factor of 10. You're much more effective at the process of making these markets or sourcing these components at the lowest possible cost. ...If you were a customer in the old days you wouldn't be in the market every day buying what you wanted. You kind of bundled it up because it was so complicated. Now, what we're seeing is people are transacting much more frequently with smaller volumes, and our economics are just as good for small volumes as they are for big volumes. You're offering customers a product that fits their need better, and it doesn't cost us more. Q: What's the advantage for the customer of being in the market more often? A: In a really volatile commodity like natural gas and electricity, if you like the price and you like the product, go ahead and [buy] it. Don't wait.... You can just do things continuously, and that's a huge advantage to the customer. ... It hasn't changed our fundamental business model. I think it's going to change a lot of other people's fundamental business models because they weren't in that mindset to begin with. Q: Does it mean Enron should be more profitable? A: Absolutely. Our physical volumes were up 44% in the first quarter. Anytime your liquidity goes up, you have more product to sell. The more volume you have running through the shop, the more value-added you can create [for] that volume, which should significantly increase our growth in earnings. Q: How much of the increase in volumes is growth in demand for power, vs. market-share gains? A: If you look at our path of volume increases, gas is probably the best one because it is pretty mature. We were running low-double-digit growth rates, 10% to 11%. The first quarter we were up 55% in natural gas. That ain't growth in the market. That's market share. Q: Give an example of a new product that the Net allows you to offer. A: The biggest growth market right now for natural gas is for peaking power facilities. It's very hard to package natural gas for peaking facilities. If the [electricity] grid starts getting congested, five minutes later you want to be able to turn that facility on. When you turn on one of those big gas facilities, you're sucking in a couple hundred million cubic feet of gas. It's enormous. The only people who can do that are the people who have liquidity. If EnronOnline gives us more liquidity, we can offer a product to the peaking business that we probably couldn't have offered before. People are spending tens of billions of dollars building these new peaking facilities. Who's going to supply the gas for them? Now because we have EnronOnline, we're in a far better position to provide that product than we were before. Q: How do you see some of the online trading systems being created by rivals affecting what you do? [Enron is the buyer or seller in every trade, making it a principal-based system. Others plan to match buyers and sellers but not take ownership of the commodities.] A: ....A matching system in these kinds of commodities is inherently inferior. Q: Why? A: .... Say you're a gas distribution system or a power plant and you need gas, so you post that you're willing to buy gas at such and such a location for some price. Then you wait. You're sitting there hoping someone's going to come up on the other side and say, "I have gas at such and such location." If you get matched, then you have to look at the person you've been matched to...you have to get a lot more information about the individual, then you have to decide if you want to use that, and then you might even have to exchange contracts. Now contrast that to EnronOnline. A guy knows he needs gas in the next couple of years. He'll click on the product, which is gas at such and such a location. He can call up all the contracts, see the specific wording, see the specific capability we have to deliver at that location.... If gas prices are moving a lot, would you want to post for a match and hope that all that stuff works out? Or if you really need the gas, do you want to come onto EnronOnline and push the button to get the deal done? It's a totally different structure. Q: How does this change the job of your traders? A: In the old days, a trader would have to proactively initiate a transaction. Now,...the price is there, and the customer is choosing when they want to transact. It's totally reactive.... Their jobs have fundamentally changed.... It's become a much more intense, much more real-time business for people. [Enron is building or leasing some 18,000 miles of fiber for delivering TV-quality video for such content providers as AtomFilms and Road-Show. It also plans to provide real-time switching between its network and others' to give customers bandwidth on demand and to create a market for trading bandwidth.] Q: Why aren't rival telecom companies building similar systems? A: Their model is exactly the opposite of that. We've turned the typical telecom model on its head. Their model is you build content and then you build a pipe to carry it or vice versa. Our model is...we want to get [content] off our network as soon as possible because we want to keep as much of [it] empty as we can to provide surge capacity if everybody else is full. If I'm a content supplier, I want...to have the ability to go on anybody's system. [Enron's] is a fundamentally different network than a Qwest or a Level 3. Our network is like a giant switch. We're trying to switch into everybody else's network. Some of those carriers are more amenable to that than others. They are to us what the utilities are. The utilities don't want us anywhere near. They like having that customer locked up to that generation facility. Q: Can these other networks hold out and not play ball with this sort of trading? A: They sold circuits under long-term contracts, so they don't really own the capacity. The customers [do]. Even if Qwest didn't want us on their network, if one of the customers that holds capacity has surplus they can sell it to us. Q: How far off is it until there's the liquidity to do that kind of trading? A: We'll see. The market's just starting. It's going to be easier than it was in gas and electricity to create liquidity.... In telecom, you have millions of willing buyers. Everybody wants video, and [there are] lots of willing sellers because everybody owns these circuits that are underutilized. For the first time, we've got both sides, and there's no regulatory inhibition to matching buyers and sellers, so it should be a lot faster than it was in the gas and electric business. Q: It sounds so simple. A: It is. All good ideas are simple. This one's real simple.... You look for something that's inefficient and ask why is it staying that way? There are lots of markets that are really, really inefficient. |
