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Date: Mon, 11 Jun 2001 14:53:00 -0700 (PDT)
From: mark.taylor@enron.com
To: ted.bockius@ivita.com
Subject: Another Article
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Broadband Networking News Mark Holmes 03/27/2001 Enron Hits Back Q=
uickly After Blockbuster Failure Houston-based energy and communications co=
nglomerate Enron's Enron Broadband Services unit signed a deal with Electro=
nics Boutique earlier this month to deliver video games on demand in a bid =
to boost content offerings to its broadband customers as part of its entert=
ain-on-demand (EOD) service. Under the terms of the March 19 deal, Electro=
nics Boutique subsidiary EBWorld.com will stream leading games for rental t=
o Enron 's broadband customers. The deal is a positive development for Enro=
n after the collapse of a deal with Blockbuster, which the companies announ=
ced March 9, that would have given Enron exclusive rights to deliver movies=
for a video-on-demand service. "The exclusive relationship has not yield=
ed the quantity and quality of movies needed to drive demand for this excit=
ing new on-demand service," explains Kenneth D. Rice, president and CEO of =
Enron Broadband Services. "The Blockbuster announcement was disappointing,=
but I do think the technology and systems to be able to do that are virtua=
lly complete," notes James Yannello, a utilities equity analyst at UBS Warb=
urg. "I do think they will be able to potentially a deliver a variety of it=
ems to end-users. I would guess they need to do some more deals, driving tr=
affic on [to] their systems. I think they can bounce back pretty quickly fr=
om the Blockbuster deal. I think the blow was more psychological and I woul=
d suggest it was used as an excuse for some others to lower some very aggre=
ssive price targets on the company, which is what they did." The failure o=
f the Blockbuster deal was a blow for the company as the exclusive 20-year =
agreement could have given Enron significant upside in the content delivery=
business. "I don't see Blockbuster as being a broadband killer for Enron=
," Bob Christensen, a utilities equity analyst at First Albany Corp., tell=
s Broadband Networking News. "I think they will probably [get] one or two a=
nchor tenants before the year is out. I am optimistic." The deal with Elec=
tronics Boutique and the failure of the deal with Blockbuster emphasize the=
importance Enron is placing on securing content for its broadband network.=
Yet its main revenues from the telecom arena will continue to be derived f=
rom its bandwidth intermediation business, which uses pooling points to pro=
vide the physical interconnectivity between bandwidth buyers and sellers, a=
llowing users to provide bandwidth on demand. This is Enron 's core telecom=
business. The content deals, while important, are not being factored into=
most analysts' forecasts on the company. "I am confident that the conten=
t delivery business will be successful," says Ray Niles, a utilities equity=
analyst at Salomon Smith Barney. "The fact of the matter is they did get a=
nother deal. It was not as large as the Blockbuster deal, but they did get =
another one in there. We are not putting numbers in our model and our earni=
ngs forecast for content delivery. Whether it is very successful or not ver=
y successful, in our forecasts, we are not assuming any particular forecast=
for the content delivery business. I think bandwidth intermediation is the=
ir competitive advantage." "The reality is that no one had any earnings (f=
rom Blockbuster) in the company projections for several years at best," Yan=
nello adds. "It was a big name and was portrayed to be the killer app. It i=
s disappointing, but I do think they will be able to bounce back with other=
deals. I also think in an early sense this gaming announcement is probably=
the tip of the iceberg of what they will be able to bring in." Enron, whi=
ch produced revenues of over $101 billion in 2000 from its various business=
es, is still rated highly by analysts, despite the failure of the Blockbust=
er deal. "We have a $100 target price and a 'strong buy' rating," Yannell=
o says. "That assumes roughly $75 of value for their energy business and $2=
5 of value for their broadband services division. I think given what has ha=
ppened in the broader market in the telecom arena, and given that the Block=
buster deal has falling apart, I think we be will waiting a while before we=
expand that $25 telecom valuation." =09