Enron's digital demise has ripple effect

The energy giant's fall will slow down growth of online trading in commodities such as energy and add another dose of bad news to an already troubled communications industry.

5 min read
The demise of energy giant Enron will have a far-reaching impact on the technology industry, briefly stalling the growth of online trading in commodities such as energy and adding another dose of bad news to an already troubled communications industry.

Enron filed for Chapter 11 bankruptcy Monday and announced a lawsuit against former merger partner Dynegy, another energy company.

Enron's fall is the largest, and one of the most dramatic, corporate flameouts in history. As recently as last year, Enron was among the most successful companies in the world, ensconced in the top 10 of the Fortune 500 and reaping sales of $100 billion per year. The stock, which now trades for less than 50 cents, was valued around $90 per share a little over a year ago, giving it a market value around $80 billion. Enron is now worth just over $300 million.

EnronOnline, a digital exchange that was used to trade a wide variety of items, such as gas and network bandwidth, became one of the largest Net-based business-to-business exchanges in the world and provided the company with about 90 percent of its earnings, according to recent figures.

Enron's woes will likely set back online trading of energy commodities--at least in the short term, analysts said. But that doesn't mean the underlying concept is faulty, according to analysts.

Enron's collapse "doesn't take away from business-to-business exchanges and online trading--those are good concepts," said John Gonsalves, a vice president at industry consultants Adventis.

"E-commerce...is here to stay," Gonsalves said.

Enron said Monday that it was looking for a partner in the financial services industry to provide credit support for its online exchange, possibly to draw wary traders back to its Web site and trading floor.

"If these discussions are successful," said Greg Whalley, Enron's president and COO, "they could result in the creation of a new trading entity with a strong and unencumbered balance sheet, the industry's finest trading team, and its leading technology platform, all backed by one or more of the world's leading financial institutions."

Enron had grand plans to bring its market-making exchanges to other industries such as swapping shipping space on freighters. But these plans will likely be stymied for some time because the company's online arm was a major player in the trend.

Enron's economic failure will likely dismantle the vast broadband network operated by the company, flooding the used equipment market with more Internet gear. With other high-profile bankruptcies such as PSINet already affecting the communications industry, that's the last thing the market needs, analysts said.

New Economy casualty
Enron's rapid fall can be traced to a steep decline in energy prices, a mountain of debt, and a series of questionable partnerships now under investigation by federal regulators. The combination of issues scared off potential merger partner Dynegy earlier this month.

Enron's rise was predicated on its vast energy and pipeline holdings and its ability to take advantage of opportunities in deregulated markets, setting prices for commodities such as energy.

How did Enron's online exchange grow so quickly? Before Enron, traders had to make several calls to get an accurate reading on the prices of commodities such as gas, according to analysts. With Enron, they simply went to the company's exchange Web site and clicked on the prices they were willing to pay. Enron priced both "buy" and "sell" items attractively, so hoards of traders came to the exchange because they could make more money.

"The demand is still there," said Jim Walker, analyst with technology consultants Forrester Research. "One-to-many online exchanges for highly leveraged financial products is not going to survive" the Enron debacle, Walker said. "However, it bodes well for a many-to-many model of exchange."

Added Gonsalves: "The real jewel was EnronOnline. The winners are competitors to EnronOnline." Competitors include exchanges such as IntercontinentalExchange and other energy companies like Dynegy. Analysts said it is difficult to tell at this point who would be interested in buying Enron's online arm, which was one of the primary attractions for Dynegy.

Broadband bust
Another casualty of Enron's reorganization could be a sprawling broadband network currently under construction. The company started building the network in 1998, during a telecommunications boom that assumed there was demand for an infinite supply of bandwidth. Since then, the networking unit of Enron has incurred steep losses, with the company reporting an $80 million loss for its most recent quarter

Enron owns 18,000 miles of fiber, according to the company. A representative for Enron's broadband business did not return phone calls seeking comment.

In a domino effect, Enron's woes could hit network equipment makers, such as Cisco Systems, Avici Systems, Ciena and Sycamore Networks, that have signed contracts with it to sell a wide array of gear for its network in recent years.

Sycamore, Avici and Cisco representatives said purchases from Enron are not part of their ongoing financial forecasts and they have already received payment for equipment shipped to Enron. A Ciena spokesman said Enron did not have a material impact on fiscal year 2000 earnings and, in keeping with company policy, would not comment further on Enron's purchases until it reports fiscal 2001 earnings. The company reports fiscal 2001 earnings Dec. 13.

But that does not alleviate the potential that hundreds of Cisco routers, for example, could flood the market for pennies on the dollar as a result of Enron's financial straits. That could force a company such as Cisco or Sycamore to either repurchase the gear---to take it off the market--or lose business in the short term as a result.

The company had also planned to extend the online exchange it built so telecommunications companies could trade excess bandwidth to other areas of the technology industry. "The company is now actively trading voice minutes and developing markets for semiconductors and media services," according to information found on its Web site.

Williams, Dynegy and El Paso, Enron's primary competitors in the energy markets and online energy exchanges, also built, or are planning to build, fiber-optic networks. It is unclear thus far just how Enron's woes might affect its rivals, according to analysts.