Enron's Giant Bandwith Scam

by Stephen Pizzo

More of Enron's Smoke and Mirrors

By Stephen Pizzo
September 13, 2002

At some point it dawned on the wheeler-dealers at Enron that selling real things - like gas and oil - had it limits. What they needed were products that had no physical limits. Energy contract futures were their first discovery, and how sweet they were. No more messy oil or smelly gas to deliver - just electronic bookkeeping notations. How terribly civilized. How wonderfully fungible - especially when they were kept in sunny offshore Caribbean accounts. Like the old song about music: "It goes in heregoes around and around and around and aroundand comes out here" - or - maybe it never comes out.

Energy future contracts were great but they still had some relation to the physical world - actual energy products. And, that placed some physical-world limitations on just how much they could be manipulated.

That's when Jeffrey Skilling discovered a product so ephemeral it bordered on metaphysical - bandwidth. Hot dog! It was weightless, colorless and odorless. A million angels could dance on the tip of this pin and one could argue without fear of contradiction that there was still room for a million more. This was the scam artist's Holy Grail and Enron declared it as its own.

Here was the thrust of the scam. Bandwidth - which is nothing more than available digital communication capacity - (i.e. internet access) should be treated like a commodity, the company said. So, Enron would begin brokering available bandwidth. Say Company A has a contract that allows them free use of a large-capacity "T1" highspeed data line. But, it only uses it during hours 9 am to 5 pm daily. During the rest of the day they are not using the "space" on that line. Enron would add that unused bandwidth capacity to its inventory and find customers who need bandwidth during that period and contract it to them.

It's an over-simplified explanation for what became a much more complex scheme. Enron had finally found the perfect product. It was no longer selling anything real, not even an atom. Instead they were selling spacethe space through which photons travel down fiber cables. Enron was now brokering something so wispy, so hard to quantify, so difficult to audit, that the sky was the limit.

At the time Enron's Skilling was hawking this new business line - Enron Broadband Services (EBS) - to investors, the company was being praised for its vision and for being the first company of the emerging cyber age. In fact it may have been Enron's most audacious scam.

In January 2001, during Enron's annual analysts' meeting at the Four Seasons Hotel, Enron's then-President Jeff Skilling aggressively promoted the new business. He went so far as to claim that their new virtual product line was worth at least $40 per share all by itself. Back in Houston, EBS employees watching the presentation on closed circuit TV gasped in amazement. They knew that in reality EBS was little more than a giant smoke and mirrors operation.

Almost everything EBS did was phony. In the summer of 2000, EBS announced it would purchase 18,000 servers from Sun Microsystems - ostensibly to manage all that bandwidth they were brokering. It never happened. But, it was a good show for investors who poured more money into Enron stock, which, of course, rose on the basis of this news.

At one point Enron executives filled a room full of computer terminals staffed by Enron employees from other departments when analysts came to see the new EBS operation. The terminals were not connected to anything. The whole thing was an elaborate Hollywood set.

Bandwidth was also the perfect way for likeminded companies to manufacture illusory revenue streams. Investigators have been looking into a deal Enron did with Denver-based communications company Qwest back in September 2001. Qwest agreed to pay Enron $308 million for use of "dark fiber" -- unused fiber optic capacity. In exchange, Enron agreed to pay Qwest between $86 million and $195 million for access to active sections of Qwest's network.

The deal was all nonsense, of course, allowing both companies to record fat revenues for the period. In reality, the deal allowed Enron to avoid reporting a fat loss that period.