Jeffrey Skilling, who transformed Enron Corp from an oil pipeline company into a trader of hundreds of commodities, said his big bet on broadband trading failed because he "overestimated the opportunities."
The former Enron chief executive officer told a Senate panel investigating the biggest-ever corporate bankruptcy that his strategy anticipated an oversupply in fiber-optic networks. Enron planned to exploit a glut to build its business, as it did with electricity and natural gas trading, he said.
PHOTO: REUTERS
Senator John McCain, an Arizona Republican, asked why Skilling told Enron employees in March last year that the business faced a "meltdown," then a few weeks later told investors the broadband operation was "going full speed, pedal to the metal."
The two statements weren't contradictory, Skilling said.
"The market was progressing much more quickly than the electricity market that I had also been involved in starting back in the mid-1990s, so I felt pretty good about the rate of progress," Skilling told McCain.
Enron Broadband Services, created in December 1999, planned to dominate what Skilling predicted would be a US$500 billion market by 2005, fueled by increased demand for high-speed Internet access. By last year, Internet companies were going out of business and those that remained had more fiber-optic network space than they needed.
"That was right about the time bottom was dropping out," said John Ryan, chief analyst for RHK Inc, a communications technology research firm in San Francisco. "People didn't know how far it was going to fall or what it would look like when it hit bottom." Industry experts estimate that about 20 percent of the world's broadband fiber is being used.
Enron's bankruptcy cost more than 4,000 people their jobs.
Investors, including some Enron employees who had purchased the stock for their retirement plans, lost US$26 billion.
Enron set up its broadband unit as Internet growth was peaking and thousands of companies were creating retail Web sites, electronic exchanges and inventory management systems that needed to move data over high-speed lines.
Enron planned to make a market in access to the lines, serving as a middleman between companies that wanted to sell transmission capacity and those that wanted to buy it.
"Too many people built too many networks," said Ron Banaszek, director of bandwidth trading for Tradition Financial Services, an over-the-counter commodities broker in Stamford, Connecticut.
"It's hard to have a trading market if everybody wants to sell."
Global Crossing Ltd and other companies that built fiber-optic networks have filed for bankruptcy protection. Enron began building a fiber-optic network, spending US$436 million in 2000 alone on 18,000 miles of cable that it planned to connect to transmission equipment and lease to users. It planned to spend as much as US$1.95 billion to beef up its broadband operation by 2003.
"I'm not sure there has ever been an industry in history that has experienced the change of fortunes that has occurred to the long-distance fiber optic business in the last year and a half," Skilling said.
"In retrospect, we all overestimated the opportunities available in the broadband business."
Enron expected falling broadband prices would allow the company to expand its network and improve its position as a market maker, Skilling said.
"We believed that as prices dropped, there might be more capacity available to create a traded market in bandwidth," he said. "Our strategy in broadband was predicated on a bandwidth glut."
Enron executives talked up the business to investors for much of last year.
In January last year, after fiber-optic prices had been falling for the previous six months, Skilling and former Chairman Ken Lay told an investors conference that the broadband business was booming. Lay said the division had reached the "critical mass" it needed.
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