Enron Corp. - University of California | Office of The President

not have the legal right to electronically distribute movie content – the indispensable element of a
successful broadband based VOD system – in cable-quality digital format. Second, due to technical
problems with its broadband network, Enron could not transmit movies or other content with
sufficient quality or speed to permit the VOD system to ever succeed. Notwithstanding these
substantial defects – plus gross abuse of mark-to-market accounting – Enron discounted and
recognized a wholly unrealistic projection of revenue over the entire 20-year life of the Blockbuster
VOD venture into current periods, offset it by unrealistically low expense estimates, and failed to
take any proper reserve for uncertainty of outcome or collectability. Consequently, Enron secretly
recognized over $11 million of profits in the 4thQ 00 and the 1stQ 01 – two-thirds of the earnings
claimed by EBS in those two periods – in one of the largest one-time and upward manipulations of
Enron's financial statements. Specifically, in 00, EBS executives were desperate because they were
not generating any revenue, which was the catalyst behind the deal with Blockbuster. But an EBS
director of engineering stated: "Flat out, we didn't have the technology to do it, and we didn't have
the expertise. It was a deal EBS executives entered into with Blockbuster with no capacity to do
it." A former EBS employee, who worked directly on the Blockbuster deal in multiple capacities,
including product development, financial analysis, and content distribution, stated: "[T]he
Blockbuster deal was a fraud, and Enron's top management knew it." Employees working on the
Blockbuster VOD deal were told time and again, after they stressed the deal's lack of economic
sense, to "just drink more Enron Kool-Aid." The Blockbuster deal had no economic substance at
the time:
• Discussions with Blockbuster first got off the ground over two days in 3/00. Even
though at that point EBS personnel had no way to deliver the VOD product, and no
technical knowledge of what they were to deliver, within 48 hours the EBS team had
agreed to a 20-year exclusive deal for VOD.
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