I have to get some work done today, but I thought I would share some of what I've been reading about this company. I love finding those artifacts circa 1998-9, since from these you can really find out who should eat shit. (Maybe later today the stuff on Japan's open standards Tron vs. the WINTEL duopoly.)
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http://www.managersart.com/chap.1to10/chap1.htm
Robert Merton For his role in developing the means to determine option values, the celebrated Black-Scholes options pricing model, Harvard Business School's Robert Merton shared a Nobel prize in 1997 with Myron Scholes. (Fischer Black died in 1995, at age 57). Although his name does not adorn the model, Merton, now 55 and Harvard's John and Natty McArthur University Professor, was the First to recognise a practical structure for a theoretical solution.
"In a futuristic keynote speech last spring, Enron Corp. president and chief operating officer Jeff Skilling explicitly made the case that his and his managers' thinking across all facets of Enron's operations is built around the integration of modern financial technologies and physical technologies. This integration strategy, made possible by the financial innovation and vast reductions in transaction costs of the last decade, is already causing fundamental changes in the industrial organisation of the power and energy industries. Its application is likely to spread to other industries, with similar effects.
"Thus, learning how financial-asset concepts can be applied to production decisions as with real-options analysis, and understanding financial contracting so that integrative strategies can be executed effectively, may become essential managerial skills for competitive success."
Paul Krugman
http://www.wws.princeton.edu/~pkrugman/eman.html
"The retreat of business bureaucracy in the face of the market was brought home to me recently when I joined the advisory board at Enron--a company formed in the '80s by the merger of two pipeline operators. In the old days energy companies tried to be as vertically integrated as possible: to own the hydrocarbons in the ground, the gas pump, and everything in between. And Enron does own gas fields, pipelines, and utilities. But it is not, and does not try to be, vertically integrated: It buys and sells gas both at the wellhead and the destination, leases pipeline (and electrical-transmission) capacity both to and from other companies, buys and sells electricity, and in general acts more like a broker and market maker than a traditional corporation. It's sort of like the difference between your father's bank, which took money from its regular depositors and lent it out to its regular customers, and Goldman Sachs. Sure enough, the company's pride and joy is a room filled with hundreds of casually dressed men and women staring at computer screens and barking into telephones, where cubic feet and megawatts are traded and packaged as if they were financial derivatives. (Instead of CNBC, though, the television screens on the floor show the Weather Channel.) The whole scene looks as if it had been constructed to illustrate the end of the corporation as we knew it. .... Who would have thunk it? The millennial economy turns out to look more like Adam Smith's vision--or better yet, that of the Victorian economist Alfred Marshall--than the corporatist future predicted by generations of corporate pundits. Get those old textbooks out of the attic: they're more relevant than ever. "
http://www.rff.org/resources_archive/pdf_files/139_inside_rff.pdf
William D. Nordhaus (academic on their board) [Hey, Brad Delong, isn't he one of your influences?]
Nordhaus is the A. Whitney Griswold Professor of Economics at Yale University. He joined the Yale faculty in 1967 and has been a full professor of economics since 1973. He received his undergraduate degree from Yale and his Ph.D. in economics from the Mass-achusetts Institute of Technology in 1967. Nordhaus was a member of the Presi- Resources, Reforming Federal Regulation, and Managing the Global Commons.Nordhaus’s research has focused on economic growth and natural resources, as well as the question of the extent to which resources constrain economic growth. He also has conducted studies in wage and price behavior, augmented national accounting, the political business cycle, productivity, and the costs and benefits of regulation. Nordhaus is the A. Whitney Co-author of the classic textbook, Eco-nomics, with Paul Samuelson, Nordhaus has written several other books, including Invention, Growth and Welfare, Is Growth Obsolete?, The Efficient Use of Energy Resources, Reforming Federal Regulation, and Managing the Global Commons. Recently, his work has focused on the economics of global warming, including the construction of integrated economic and scientific models to deter-mine an efficient path for coping with climate change.
And the business people weren't any better than the economists:
http://www.businessweek.com/magazine/content/01_51/b3762007.htm
Everyone Loved Enron
Here's what some management gurus said about Enron's rise, and what they think now
JAMES J. O'TOOLE, Professor, Univ. of Southern Calif.
Before: "Leadership is not a solo act...it is a shared responsibility, a chorus of diverse and complimentary voices. To an unusual degree, [Enron] is chock-full o' leaders"
After: "Egg all over the face is an understatement. As embarrassing as it is, we basically took the word of Lay and his people. Was there a way to spot that the emperor was wearing no clothes? I don't think so."
CHRISTOPHER A. BARTLETT, Professor, Harvard Business School
Before: "Skilling and Lay created `a hotbed of entrepreneurial activity and an engine of growth."'
After: "There are absolutely some strong, helpful lessons to learn by what they did right. Unfortunately, all those are trumped by the mistakes they made."
GARY HAMEL, Chairman of consultant Strategos
Before: "Enron isn't in the business of eking the last penny out of a dying business but of continuously creating radical new business concepts with huge upside."
After: "Do I feel like an idiot? No. If I misread the company in some way, I was one of a hell of a lot of people who did that."
SAMUEL E. BODILY, Professor, University of Virginia
Before: "Skilling and others have led a transformation in Enron that is as significant as any in business today. This is brand new thinking, and there are broad implications for other companies."
After: "History can't be very kind to it. It's sad: The innovation and ideas and what was good about what they did may be lost in the demise of the company."
And how Enron bullshitted the markets and admitted it a long time ago:
http://www.internetweek.com/transformation2000/coverstory/skilling.htm
InternetWeek: So you're doing the same with telecom bandwidth--buying most of it from other sources. But you do have your own network, right?
Skilling: I'll make a confession. We never strung any fiber along our pipelines. Everybody thought that, because then they say, "Oh, OK, now we understand why a pipeline company is going into the telecom business." 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. We have our own fiber, but it had nothing to do with our pipes.
InternetWeek: So what's next after telecom? What Internet-based markets will you create down the road?
Skilling: We've set up a new company called Enron Net, whose reason for existence is to extend this business model into other commodities. We've started a Web site for the pulp and paper business. We're doing metals. We're looking very hard at data storage.
Data storage is a classic commodity. And you don't want to buy 50 times what you need. You want it when you want it. So if you create a real-time, on-demand market for data storage, look at the power. Especially if you marry it with a fiber network. Instead of having the data stored on expensive real estate in Manhattan, put it in a corn field in Illinois for crying out loud, and if you want it, call us up and学ell, you don't have to call us up. We'll give you an API. We'll have an API that's available and we'll just put it into whatever software you develop, and when you need the storage, the program interfaces with Enron. Use the bandwidth and get it to where the storage is.
InternetWeek: Are you looking at any other areas?
Skilling: We're looking at logistics.
InternetWeek: What do you make of all the other e-marketplaces sprouting in just about every industry?
Skilling: Again, our business model, I think, is going to be the best thing because a lot of these guys are just putting up a bulletin board. A bulletin board does not create liquidity. I don't think people have fully figured that out.
InternetWeek: But isn't there concern among buyers and others that Enron is a player in the marketplaces it operates, that it's biased?
Skilling: We went out and talked to some analysts before we launched Enron Online last November, and it was absolutely unanimous that it wasn't going to work. The hell it doesn't work. It is a better business model.
And for the ultimate in bullshit:
Let me walk you through a typical B2B site and compare it to Enron Online. Take a typical B2B site for natural gas and electricity. You're a distribution company in California and you really need some electricity. You've got to get it scheduled. So you punch in on the Web site an "offer to buy." You sit and wait and wait and maybe someone offers to sell. OK, you match to XYZ number. OK, now, who is XYZ? What is their credit like? Do I trust them to deliver? When they say they have electricity, do they really have electricity or do they have a commitment from somebody else to get the electricity there? What transportation and transmission is offered? So you spend all this time and finally have to get on the phone and call them up and find that out.
Meantime, electricity is the most volatile commodity in the world, and the price has moved. In five minutes, the price can move up by a factor of three. Well, at that price, this guy is not going to sell it to you, right? He's going to sell to somebody else. So you're sitting there and you've got nothing, and you need electricity really, really bad and the price just tripled. That's the typical B2B Web site model.
Now come to Enron Online. Two weeks ago, you knew you were going to need some electricity. So you logged on to Enron Online. You know the contracts. You know exactly how we deliver. You know exactly what the transportation plans are. You know exactly how the back office works. You know it's Enron. You can check the credit. You did that two weeks ago. So you need some electricity. You log in and see the price, Western Electric at such and such for the location. OK, done. Push the button. Less than a second, it's done.
That's a fundamentally different construct, right? And it's a fundamentally better construct. No one in the world is going to take the other way over Enron Online. And if you look at any marketplace in an illiquid commodity, you need it to have someone providing liquidity.
With Enron Online, when you push the button, you have transacted the deal. You have an absolute guarantee that Enron will provide that product. And then we do whatever is necessary to make sure that we can deliver it.
When people talk about B2B or B2C sites, they say the problem is fulfillment. If you went to one of these sites and bought a toy, you still don't know if they are going to deliver it to you. Well, in a commodity, that's a big problem.
But there's another problem, which is certainty of execution. Certainty of execution and certainty of fulfillment are the two things people worry about with commodity products. You cannot provide certainty of execution in an illiquid commodity without having someone act as a principal in the system. You just can't do that.
And so these guys are setting up all of these sites, and all of a sudden people are going to realize that the only value they're adding is they've got a pretty site. But the value is with the people providing liquidity
We have thousands of people that are doing nothing but ensuring that we can get the product at the price. We have people that understand pipeline networks to the nth degree, because we're committing to the price to deliver on. I've got a floor of people that does nothing but work pipelines. I've got a floor that does nothing but work transmission. I've got a floor that does nothing but call up producers to find out how the wells are doing. I've got a floor of people that do nothing but talk to people in the power companies and say we've got extra power at XYZ location; take it from there. It's just this giant machine that's basically figuring out how you can create the network so that when we make a price, we abide by the price.
And the Clinton gov't bought the line of bull as much as anyone:
http://www.eren.doe.gov/electricity_restructuring/weekly/aug15_97.html
DOE, EIA Press Release August 13th
At this year's Annual Meeting of the American Legislative Exchange Council, Kenneth L. Lay, Enron Corp. Chairman and CEO, delivered a speech entitled "Electricity Restructuring: Competition... Not Accommodation!." In his speech, Lay urged more than 600 legislators to say yes to electricity restructuring and no to electric monopolies who are trying to stop competition. Lay believes that the problem with restructuring legislation is that it has been influenced by monopolists who seek to prevent deregulation and, therefore, the legislation only does half the job. Lay warned of serious affects on competition if policy makers persist in this kind of "halfway reform." Finally, Lay pledged "that Enron intends to be the people's cops?to blow the whistle on monopolies and to challenge legislators and regulators to get the job done, done right, and done now." Power Marketing Association's Daily Power Report August 14th
And wow, what journalism and whaaaaat bullshiiiiit.
http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2799242-4,00.htm l
Enron, the Houston-based energy trader, has proved the e-business experts right?and proved them wrong.
For years, visionaries predicted that computer networks would create new marketplaces where buyers and sellers would find each other without a middleman, and a freer-than-ever market would drive prices to unbeatable levels. They were right about the Net opening markets. But countless e-business exchange failures during the past year reveal that simply hooking computers together doesn't create a perfect marketplace. There must be equilibrium?a buyer for every seller who comes to do business, and a seller for every buyer. Public e-marketplaces can't guarantee that.
But Enron can. For every transaction at EnronOnline, its commodity-trading Web site, Enron itself is the buyer or the seller. When you show up at EnronOnline to trade one of 16 broad commodities, Enron has a publicly posted price at which it will buy?and a slightly higher price at which it will sell. That price difference, the spread, is market maker Enron's profit. It may be just 1 percent of the value of the transaction, but it adds up. Enron does more than 4,000 online transactions in an average day; deals average nearly $500,000. Last year it made $979 million on sales of $101 billion. Long live the middleman.
Enron has adapted its Web-based trading system from natural gas to make new markets in electricity, lumber, pulp and paper, plastics, metals, broadband capacity, crude oil, and other limited resources. Where before a buyer might have needed a morning's worth of phone calls to hunt down prices, now he can go to EnronOnline and buy a commodity instantly with no transaction fee at a market-driven price. Easier price discovery attracts buyers and sellers. More trading builds liquidity. And more liquidity tends to narrow spreads, resulting in better prices?and more deals for Enron to handle.
Deal flow is key. The more commodities Enron handles, the more it can turn supply and demand into value-added financial instruments like swaps. It can sell a contract that allows a gas user to lock in a fixed price for a set number of years as a hedge against price spikes. It can provide the gas a power plant needs to produce electricity or, if gas prices spike, simply provide electricity to the power company.
Technology makes it possible. A long-term gas contract that in 1981 took two years to execute?and in 1997 took two weeks?now takes less than a second online. The company developed EnronOnline using Macromedia Shockwave, a tool more commonly used to create online games. Customers just click to buy and sell. And Enron's scalable backbone makes it easy to expand.
"We can move aggressively into new markets and not get hung up with huge IT jobs," says Greg Piper (pictured), CEO of Enron Net Works. "It doesn't matter whether it's coal or paper. We don't ever have to say to [Enron CEO] Jeff Skilling, 'Hey, don't move into a new commodity, because we'll have a year-long IT project on our hands.' "
Behind the scenes, hundreds of traders who specialize in commodities work frenetically, constantly adjusting prices. High-speed trading has so overtaken Enron (about 60 percent of its deals close online) that this fall traders move to a high-tech new trading floor across the street.
Outside Houston, not everyone loves Enron. Californians curse the company for capitalizing on the state's bungled deregulation. A backlash and slowdown of energy deregulation would crimp Enron's growth, but Forrester Research predicts online energy trading will explode from a $400 billion market last year to $3.6 trillion in 2005. And Enron leads the field, with double the online trading volume of its nearest competitor.
The beauty of being a market maker is that you don't care whether prices go up or down, as long as they move. Thanks to the Internet, Enron is equipped to make the most of the uncertainty that comes with free markets.
?Don Steinberg
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Deal flow is key. The people's cops. Love it! What a new new economy! Can't wait for the next exciting episode (hmmm GE's business model is starting to look highly suspicious, since profits come from aircraft engines, finance and, intuiting here, highly leveraged acquisitions)!
Of course, I would have expected Andersen to do what it did, but what about the rating agencies that try to tell the world what to believe about a company. Why oh why did it take so long to downgrade the bonds? Come one, these ratings agencies are supposed to be American capitalism at its best.
Net artifacts searched down, commented on and posted by Charles Jannuzi