Enron Broadband Services

In 1997 Enron bought an Oregon utility and, with it, a small fiber-optic business that it grew into Enron Broadband Services (EBS) (11, 1). At its January 20, 2000 analyst conference Jeff Skilling said EBS had "already established the superior broadband delivery network" and valued it at $30 billion, which he called "conservative" (3). Enron's stock went from $54 to $72 within two trading days (12, 11). EBS lost $60 million in 2000 on $408 million of revenue that leaned on one-off fiber sales and a movie deal booked in advance, then $494 million in the first nine months of 2001 (13, 7). Enron lost the entire $1 billion it had put into the unit, according to the federal appeals court that upheld Skilling's conviction (6). Prosecutors charged seven EBS executives. Five eventually pleaded guilty, including Kevin Howard after his conviction was overturned; Michael Krautz and Scott Yeager were acquitted, Yeager after a Supreme Court ruling on double jeopardy (14, 15, 11).

The question behind this piece is whether Enron Broadband, like it or not, sits at the basis of the fast internet we use today. The record supports a narrower answer. The ideas were right and early: video on demand over the internet, servers at the edge of the network, data storage sold as a service, a market price for bandwidth. Enron announced versions of all of them between late 1999 and early 2001 (1, 13, 16, 17). But it did not have the technology it described. The unit's chief executive pleaded guilty to claiming that its network control software was "up and running" when it "had not progressed beyond the internal development stage" (18).

What survived was physical. Enron's fiber, equipment and a Las Vegas building were sold out of bankruptcy for a fraction of their cost (8, 2, 9). That building became the core of Switch, the Las Vegas data center company, which was taken private in 2022 for about $11 billion including debt (10, 19). The wider fiber glut of 1999 to 2001, to which Enron's own build-out of thousands of miles added (20), left cheap capacity that Google was reported to be buying after the crash (21, 22, 23).

So the honest version is this. Enron Broadband was a fraud wrapped around a correct forecast. Its ideas reached the market years later, through other companies, on infrastructure that a bubble had overbuilt.

In July 1997 Enron acquired Portland General Corporation and its utility, Portland General Electric, which had about 685,000 customers in Oregon (1). Enron issued 50.5 million shares and took on $1.1 billion of PGE debt, for a total price of about $3 billion (1). The Joint Committee on Taxation later noted that "Enron acquired PGE's communications business, which Enron reported to be the basis for Enron Broadband Services" (1). That business was FirstPoint Communications, a small PGE subsidiary laying fiber-optic cable around Portland (2). PGE's chief financial officer, Joseph Hirko, became FirstPoint's chief executive (2).

The first network was modest. Time Warner Telecom bought FirstPoint's original 50 miles of Portland fiber out of Enron's bankruptcy in 2004, and a former Enron Broadband construction executive estimated it had cost $3 million to $5 million to build (2). Enron's ambitions grew far faster. By 1999 the network had grown to 15,000 miles, The Oregonian reported (2). An internal list of 2000 goals, later a trial exhibit, reported "18,448 fiber miles have been constructed" (24). Enron's 2000 annual report described "Enron's 18,000-mile global fiber network" as "near completion" (13).

DCD Magazine interviewed more than a dozen former employees for a 2023 history of the unit (10). Its former chief technology officer told DCD that Houston "gave us $2 billion and said 'Go make Enron Broadband'" (10). That is a recollection, not a filing; the Fifth Circuit put Enron's investment at "more than $1 billion" (6).

Wall Street noticed in 1999. A BancBoston Robertson Stephens analyst note of July 13, 1999 carried the headline "Communications the Next Poster Child" (25). It reported that Enron "now views the communications business as a core operation" and would use its dark fiber network to "create a market for tradable bandwidth" (25). A 1999 sales deck from Enron Communications, EBS's earlier name, pitched the "Enron Intelligent Network" and listed Cisco, Intel, RealNetworks, Ciena and Sun as partners (26).

The first bandwidth trade followed. Enron Communications "announced its first forward trade of bandwidth on December 2, 1999," with Global Crossing as the seller, according to the Joint Committee on Taxation (1). Enron itself later said it had "introduced the concept of trading bandwidth capacity in May 1999" (27).

Broadband also fed Enron's earnings through an investment. Enron paid $10 million for stock in Rhythms NetConnections, a business DSL provider, and the stake later rose to over $300 million (1). Because it could not yet sell, Enron hedged the stake through a subsidiary of LJM1, the first partnership run by its chief financial officer, Andrew Fastow, and "recognized after-tax income of $95 million from the Rhythms Net investment" in 1999 (1). The partnership machinery that later brought Enron down began with a broadband stock.

Enron held its annual equity analyst conference in Houston on January 20, 2000 (11). According to his indictment, Skilling told analysts that EBS "has already established the superior broadband delivery network" and had "built this network . . . and we are turning on the switch" (3). He valued the business at $30 billion, "which SKILLING called a 'conservative' valuation" (3). In his presence, co-chief executive Joseph Hirko said EBS had advanced network control software and that it was no "pipe dream" (3). A videotape played to jurors in 2005 caught Hirko's line: "Is this something that will exist in five years? No, this is something that exists today" (28).

Sun Microsystems was on stage too. Its chairman, Scott McNealy, spoke "at the urging of Skilling after Enron agreed to buy several thousand servers," Reuters reported from the trial (28). Under the deal, IDG reported, "Enron bought 18,000 Sun Netra servers to expand its footprint to more than 2,000 points of presence," and Sun bought video streaming services from Enron (16). Reuters later described the purchase as "several thousand servers" (28). Enron's own goals sheet for 2000 set a target of 1,500 servers and marked the goal complete, recording: "Converted to a significantly more powerful server fleet and deployed 350 servers, which exceeded the targeted content delivery" (24).

The market reaction is not in dispute, but its size varies by source. The Supreme Court's Yeager opinion says the stock "rose from $54 to $67" and "the next day it reached $72" (11). The Associated Press wrote in 2006 that within two days it "leaped from $54 a share to $72" (12). Skilling's indictment uses other reference points: about $47 on January 11 and about $57 after the conference (3).

Prosecutors said Enron had arranged to profit from the jump. In "Project Grayhawk," Enron removed a fixed hedge on Enron shares held by an investment vehicle called JEDI just before the conference and reinstated it afterwards, letting it record about $85 million of earnings from the rise in its own stock (3). Enron then described these as "ordinary and recurring operating earnings from its energy business," the indictment says (3).

The people behind the pitch were named in the later indictment. Kenneth "Ken" Rice was EBS chairman and co-chief executive; Hirko was president and co-chief executive; Kevin Hannon was chief operating officer; Scott Yeager and Rex Shelby were senior vice presidents (29). Kevin Howard was vice president of finance and Michael Krautz was senior director of transactional accounting (5). Shelby, the Justice Department said, "gave a videotaped presentation regarding Enron's network control software" at the conference (14).

The software was the heart of the claim. Skilling announced a "Broadband Operating System" that would route data, link Enron's network to others and "provide guaranteed levels of quality of service" (14). A May 15, 2000 Enron release said the system "allows application developers to dynamically provision bandwidth on demand for the end-to-end quality of service necessary to deliver broadband content" (4). Hirko later admitted "that the BOS was under development throughout his employment at Enron; that it was never embedded on Enron's network" (4). Rice told the 2005 jury, "We did not have a software layer capable of doing those things" (28).

The idea came straight from gas. Enron's 2000 annual report said EBS operated "25 pooling points to connect independent third-parties -- 18 in the United States, six in Europe and one in Japan" (13). Pooling points were switching sites where networks could hand capacity to each other, and they served as "reference points for bandwidth contracts" (13). In April 2001 Enron opened them to any qualified buyer or seller, and Hannon compared them to "the Henry Hub for natural gas" (27). Enron offered "DS-3 to OC-48 capacity" for periods from one week to 20 years, with connection fees "capped at $1,000 per port" (27).

The volumes were real but small. Enron reported 321 bandwidth transactions with 45 counterparties in 2000 and "more than 72,000 terabytes of network services" delivered (13). Its internal goals sheet recorded 5,700 DS-3 months closed against a target of 5,000 (24). Bandwidth sat on EnronOnline beside gas, power, metals and weather derivatives (31). FERC staff listed it among EnronOnline's products in an August 2001 inquiry into the platform (32).

Gas trading had worked. A study in The Energy Journal found that the introduction and exit of EnronOnline "coincided with the improvement and worsening in the degree of the market informational efficiency" of US natural gas prices (33). Bandwidth never got that far.

A working paper for the Berkeley Roundtable on the International Economy, written in the winter of 2002-2003, explains why (30). It records the skeptics: a chief scientist at WorldCom's UUNET called bandwidth trading a "largely absurd notion that could only be created by financiers" (30). It shows that Enron demanded "firm" delivery backed by damages, while carriers sold capacity on a best-efforts basis, so "Few networks were willing to trade according to the Enron-backed BTO MSA" (30). And it notes that Enron's New York pooling point sat "not at 60 Hudson Street, the primary interconnection site for many networks, but at 111 8th Avenue," which added cost for anyone who wanted to connect (30). Its verdict: "Bandwidth trading was a dismal failure" (30).

Engineers saw a technical gap as well. A 2003 paper in the International Journal of Technology, Policy and Management found "a gap between what the current routing protocols allow carriers to do and what carriers would like to do in order to implement more complex business relationships to trade bandwidth" (34). It warned that spreading new routing information after each trade could take too long for a fluid spot market (34).

Prices were the deeper problem. The BRIE paper says the "overhang in bandwidth was destroying prices throughout 2000 and 2001," and that carriers had no wish to support a market that would expose the plunge (30). Andrew Odlyzko, a network economist at the University of Minnesota, argued in 2003 that the Internet's core would not need the guaranteed "quality of service" that Enron was selling, adding that "QoS has indeed not been used widely" (22). After Enron's fall, Reliant closed its bandwidth desk, Williams, Dynegy and El Paso cut back, and the exchange RateXchange "abandoned bandwidth trading entirely" (30).

On July 19, 2000 Blockbuster announced "an exclusive 20-year partnership with Enron to deliver 'video on demand,' the holy grail of broadband services, by early next year" (17, 36). Blockbuster would bring the films and the marketing to its 65 million households, Enron would carry the movies over its fiber, and DSL companies including Verizon, SBC and Covad would provide the "last-mile connection" (17, 36). Kenneth Lay called it "the killer app for the entertainment industry" (35). The Justice Department later said the contract itself was signed in April 2000 (5), which matches the date in Enron's annual report (13).

Enron's internal goals sheet put a number on it: "Blockbuster - a 20-year exclusive with $900 million in ultimate contract value" (24). The service that existed was small. By December 2000 a trial had about 1,000 subscribers, "most of them non-paying volunteers," in New York, Seattle, Portland and American Fork, Utah (35). The studios had not signed up, and Blockbuster had warned that it would take time (35, 10).

EBS needed earnings anyway. In his 2009 plea, EBS finance chief Kevin Howard admitted that "absent a large revenue-generating transaction, EBS would miss the announced target by a wide margin" (15). The answer was "Project Braveheart" (15). EBS formed a joint venture with nCube, a small video technology company, and Thunderbird, an investment fund controlled by Enron, then sold part of the venture and its expected Blockbuster revenue to the Canadian Imperial Bank of Commerce (5). Prosecutors said Enron executives "secretly guaranteed" the investors that they would profit regardless (5). Howard admitted telling nCube that its role was "simply a 'bridge mechanism' to get EBS into the next quarter" (15).

The accounting result was $53 million of revenue in the fourth quarter of 2000 and $58 million in the first quarter of 2001, which "represented the vast majority of EBS's reported revenues for both periods" (5). Skilling's indictment says the Blockbuster sale "accounted for $53 million of EBS's fourth quarter 2000 revenues of $63 million" (3). Braveheart closed on December 22, 2000, and it let EBS report the $60 million annual loss that Enron had promised (15). On a January 2001 call, an Enron senior manager told analysts that such one-off items made up only "a fairly small amount" of EBS revenue, according to Skilling's indictment (3). Enron's head of investor relations, Mark Koenig, later admitted misleading analysts about EBS on the January 22, 2001 call and pleaded guilty to securities fraud (37).

The contract was terminated on March 9, 2001 (5). Lay said "The exclusive relationship has not yielded the quantity and quality of movies needed to drive demand for this new on-demand service" (35). A Blockbuster spokeswoman told The Wall Street Journal, "It was nothing but a pilot project" (35). The Justice Department's summary is blunt: "the Blockbuster contract generated no revenue for EBS" (5).

Enron's planning documents show how central such deals had become. The EBS 2001 plan, a trial exhibit, lists "Monetizations where appropriate (Blockbuster and other VOD deals)" among its financial highlights (38). Its media line reads "Blockbuster marked or monetized; create new VOD deals" (38).

The 2000 results already depended on one-off sales. Enron's annual report said EBS gross margin "included earnings from sales of excess fiber capacity, a significant increase in the market value of Broadband Services' merchant investments and the monetization of a portion of Enron's broadband content delivery platform" (13). One fiber sale went to a Fastow partnership. In June 2000 LJM2 bought dark fiber from EBS for $100 million, paying $30 million in cash and the rest with a $70 million note (8). The Powers Report, Enron's board investigation, found "substantial pressure to close the transaction so that EBS could meet its second quarter numbers" (20). In December 2000 LJM2 sold the remaining fiber for $113 million to Backbone 1, an entity "formed to acquire the fiber" (8). The EBS 2001 plan credits the wholesale group with "$134 million Dark Fiber margin 2000" (38).

For 2001 the internal plan was bold: revenue of $925 million against a 2000 forecast of $435 million, capital spending of $700 million, headcount rising from 1,079 to 1,569, and "EIN Fully lit or facilitated by Q4 2001" (38). The unit's managers did not believe the profit target. According to the Fifth Circuit, EBS staff thought a loss of nearly $500 million more realistic and at least $110 million in the best case, yet Skilling set the target at a loss of $65 million (6). When first-quarter losses headed toward $150 million, Skilling allowed more one-off deals, and Rice "likened the monetizations to 'one more hit of crack cocaine on these earnings'" (6). In public, on January 25, 2001, Skilling told analysts "our network's in place" and said Enron stock should be worth $126 a share, $63 of it from EBS and Enron Energy Services (3).

The quarterly filings tell the rest. Light Reading, citing Enron's quarterly filing, reported that EBS lost $102 million before interest and taxes in the second quarter of 2001 (39). In the third quarter EBS reported revenue of minus $125 million and a loss before interest and taxes of $357 million, after $277 million of charges for its content business, restructuring and impaired equipment (7). Its loss for the first nine months of 2001 was $494 million (7). Skilling told Congress that EBS had been restructured twice, "the first in late March of 2001, the second in late June of 2001" (40). Rice decided in July 2001 to leave when the unit was to be folded into the trading division (12). Enron's bankruptcy disclosure statement sums it up: EBS "was unable to fulfill its business goals and, in 2001, it began to wind down its business affairs" (8).

EBS fell with its industry. Economists at the Federal Reserve Bank of Richmond found that the S&P telecommunications firms lost roughly $700 billion of market value from 2000 to 2002 (21). They quoted a February 2001 trade article: "Nearly 600,000 miles of new inter-city fiber is on the way. Capacity prices are dropping" (21). Their explanation: "demand for long-haul fiber capacity had not grown as fast as many had forecast" (21). Odlyzko traced the error to the myth of "Internet traffic doubling every 100 days"; real traffic was growing fast, "close to doubling each year," but not that fast (22). Global Crossing filed for Chapter 11 on January 28, 2002 (41), and WorldCom filed on July 21, 2002 (1).

How much did EBS contribute to Enron's collapse? It was not the largest single cause. But it consumed about $1 billion that was lost entirely (6) and still carried $1.28 billion of assets at September 30, 2001 (7). Enron also hedged technology stakes such as Rhythms NetConnections and Avici Systems through Fastow's partnerships (1, 20). Enron's directors told Congress that those partnership deals ran "in an environment already made difficult by investments that were otherwise performing poorly in its broadband, retail energy and water businesses" (40).

The Enron Task Force started with Braveheart. Howard and Krautz were arrested on March 12, 2003 and indicted on 19 counts on March 26 (43). On May 1, 2003 a 218-count superseding indictment added Rice, Hirko, Hannon, Yeager and Shelby (29). It alleged that EBS "never got beyond the development stage, never generated any significant recurring revenue, and was abandoned by Enron in mid-2001" (29). It also said five of the executives sold Enron stock for "nearly $186 million in proceeds" while promoting EBS (29). By the indictment's count, Rice sold more than $71 million, Hirko more than $35 million, Hannon more than $7.8 million, Yeager more than $54 million and Shelby more than $36 million (29). The SEC filed an amended civil fraud complaint the same day and measured profits rather than proceeds: "Hirko -- $53.0 million; Rice -- $40.3 million; Yeager -- $35.1 million; Shelby -- $17.5 million; and Hannon -- $9.0 million" (44).

Two cooperated. Rice pleaded guilty to securities fraud in July 2004, agreed to forfeit about $13.7 million and agreed with the SEC to pay a further $1 million (18). The SEC put his total at "more than $14.7 million" (45). Hannon pleaded guilty to conspiracy in August 2004, agreed to forfeit about $2.2 million, gave up a bankruptcy claim of more than $8 million and agreed to a $1 million SEC fine (46). In June 2007 Rice was sentenced to 27 months in prison and Hannon to two years and a $125,000 fine (42).

The 2005 trial of the other five went badly for the government. After a trial of about three months, the jury acquitted Yeager of the fraud counts, acquitted Hirko of some insider trading and money laundering counts and Shelby of some insider trading counts, and could not agree on the rest, including every count against Howard and Krautz (11, 47). The government brought three new indictments (14). In May 2006 a jury convicted Howard on all five counts against him and acquitted Krautz of the same five counts (48). Howard's conviction was overturned in 2007 (14). In 2009 he pleaded guilty to one count of falsifying Enron's books and was sentenced to a year of probation, nine months of it in home confinement, and a $25,000 fine (15).

Yeager took his case to the Supreme Court. The government had re-indicted him on some of the insider trading counts on which the first jury hung (11). On June 18, 2009 the Court ruled 6-3 that a jury's failure to reach a verdict on some counts does not weaken the force of its acquittals on others under the Double Jeopardy Clause (11, 49). "We hold that it does not," Justice Stevens wrote (11). On remand, the Fifth Circuit ordered judgments of acquittal on all counts against Yeager on October 19, 2009 (50).

Hirko pleaded guilty to one count of wire fraud on October 14, 2008 (4). On September 28, 2009 he was sentenced to 16 months in prison and ordered to forfeit about $7 million to the SEC's Enron Fair Fund (4). Shelby pleaded guilty to one insider trading count in November 2010 and on March 28, 2011 was sentenced to two years of probation and forfeiture of $2,568,750 (14). Under his plea he agreed not to accept payment for books, articles, speeches or interviews about his work at Enron (14).

The SEC finished last. Hirko accepted a permanent bar from serving as an officer or director of a public company and a $1 million civil penalty in June 2009 (51). In December 2012 Shelby agreed to a $1 million penalty, Yeager to $110,000 and Howard to $65,000, and the SEC dismissed its case against Krautz after his acquittal (52).

Enron Corp. and thirteen affiliates filed for bankruptcy on December 2, 2001, and 180 Enron-related entities eventually filed petitions (1, 53). Portland General Electric, where the fiber business began, never filed (53). The broadband assets were sold piece by piece. The most significant settlement was with Qwest: in a court-approved settlement "EBS received approximately $139 million and Qwest received approximately $11 million," and EBS handed over "the assets and contracts necessary for Qwest to own and operate the Salt Lake City to New Orleans fiber optic route" (8). In Portland, Time Warner Telecom paid $750,000 for FirstPoint's original 50 miles in January 2004 (2). Other carriers had leased Enron fiber: Metromedia Fiber Network, later AboveNet, used EBS fibers "routed from a location in Utah to a location in Texas" (54).

The most consequential leftover, DCD argues, was a building in Las Vegas. Enron put up a block building on East Sahara Avenue in 1998, on top of the fiber backbones of many carriers, Nevada Public Radio reported in 2004 (55). According to the station, Enron's broadband arm marketed its properties to 300 companies, "but the sales managers say no one except Roy saw any value in the Las Vegas Enron building," and it went to Rob Roy for $930,000 (55). Data Center Knowledge reported in 2008 that Switch acquired the facility in December 2002, citing court records showing it "was purchased by Colo Gateways for $930,000" (9). Enron "had arranged exceptional connectivity for its Las Vegas center," the same article said (9). DCD reported that the site became the first data center operated by Switch, although Nevada Public Radio said in 2004 that Roy had already started a similar facility in a nearby strip mall in 2000 (10, 55). In December 2022 funds managed by DigitalBridge and an affiliate of IFM Investors took Switch private for about $11 billion, including debt (19).

Skilling's own trial put EBS at the center. In February 2004 he was indicted on conspiracy, 20 counts of securities fraud, four of wire fraud and ten of insider trading (56). The indictment's section "Promoting EBS to Manufacture Earnings and Concealing Failure of EBS" covers the January 2000 conference, Grayhawk and the Blockbuster revenue (3). Rice was the second prosecution witness against Skilling and Lay in 2006 (12). He testified that when he warned Skilling in late 2000 that 2001 losses would reach $110 million, Skilling told him to hold them to $65 million: "This is the number, this is what the number is going to be" (12).

On May 25, 2006 the jury convicted Skilling of conspiracy, 12 counts of securities fraud, one count of insider trading and five counts of false statements to auditors, and acquitted him of nine insider trading counts (57). The Fifth Circuit's opinion affirming the conviction cites his EBS statements: at the 2001 analyst conference (count 23) he called Enron's businesses "uniquely strong franchises with sustainable high earnings power," and on a March 2001 call (count 24) he said EBS was having "a great quarter on the intermediation side of the bandwidth business" (6). Judge Sim Lake sentenced him to 292 months on October 23, 2006 (58). After the Fifth Circuit vacated that sentence, he was resentenced on June 21, 2013 to 168 months and ordered to forfeit about $42 million for victims (58). He was released from federal custody in February 2019 (59).

Kenneth Lay was convicted on all six counts against him in the same trial (57); his convictions were later dismissed by abatement following his death (42). Of the EBS executives, only Rice, Hannon and Hirko received prison sentences (42, 4, 14, 15).

Start with what Enron got right. It promised streaming movies seven years before Netflix began streaming in January 2007 with "about 1,000 movies and TV series" for PCs (17, 60). Even then Netflix's chief executive said "mainstream consumer adoption of online movie watching will take a number of years due to content and technology hurdles" (60). Blockbuster, Enron's partner, filed for Chapter 11 on September 23, 2010 (61). In 2003 Odlyzko had written that broadband was "not going to destroy video rental stores and NetFlix any time soon" (63). It took most of a decade.

Enron also bought servers to sell storage and computing to others (16, 13). Its 2000 annual report said EBS completed its "first data storage transactions" in January 2001 (13). Amazon launched its S3 storage service on March 14, 2006 (64). DCD wrote that Enron spent "untold millions on Sun servers, envisioning a shared on-demand compute and storage service similar to today's cloud computing" (10). But no record found here shows Amazon, Netflix or any content delivery network building on Enron's technology, and the Broadband Operating System never ran on Enron's network (4).

The strongest part of the thesis is the fiber. The late 1990s left a glut. Odlyzko calculated that all US backbone traffic at the end of 2002 could "comfortably fit on a single fiber," which "shows graphically why there is a fiber glut right now" (22). He wrote that because of the glut, basic infrastructure "sells for a small fraction of the construction cost" (22). That is what happened next. By 2005 Google was reported to be buying dark fiber that "was laid during the boom years of the late 1990's but left surplus after the dot-com crash" (23). In December 2010 Google bought 111 8th Avenue, the Manhattan carrier hotel where Enron had put its New York pooling point, for a reported $1.9 billion (62, 30). No record found here links Google's building or fiber purchases to Enron's own assets. Enron's own fiber passed to Qwest, Time Warner Telecom and others, and its Las Vegas building passed to Switch (8, 2, 9).

Here the thesis weakens. Enron's network was a small part of the glut; the Richmond Fed's account of the long-haul build-out names Qwest, Level 3 and IXC as examples of the new builders and does not mention Enron (21). The fast internet in American homes runs mostly over last-mile networks that Enron never owned. At the end of 2023 the FCC counted 73.4 million residential cable connections and 28 million residential fiber-to-the-premises connections (65, 66). And the idea Enron cared about most, a liquid market in bandwidth, never arrived (30).

So the defensible claim is narrow and still striking. Enron Broadband described the streaming, cloud and edge internet a decade early, faked the results, and added its own fiber to a bubble whose wreckage, including pieces of Enron's network and its Las Vegas building, was later bought cheaply by others (3, 20, 2, 9, 10). "Fraud was at the heart of the business," DCD concluded (10). The future arrived anyway, on other people's balance sheets.