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

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.
• EBS employees knowledgeable about the technical challenges knew from the day the
deal was announced that the fledgling EIN could not then – and probably never
would be able to – deliver VOD as represented by Enron. In 6/00, Rice personally
tried to recruit two EBS engineers, who had left Enron out of frustration over EBS
problems, by telling them that they were essential because "we [Enron] can't deliver
the Blockbuster deal."
• While Blockbuster had the rights from Hollywood to supply videotapes, it did not
have electronic-content distribution rights for movies. When Enron tried to
convince Hollywood to grant Blockbuster the right to distribute digital video content,
Hollywood refused. EBS never succeeded in persuading Hollywood to grant
Blockbuster the requisite content rights. By mid-11/00, the reality was that
Hollywood studios would not give DSL-quality content to Blockbuster. Thus, Enron
did not have one movie to offer, let alone DSL quality.
• While Enron announced that the Blockbuster deal test markets were a huge success
in 12/00, Enron executives behind the scenes were directing the VOD team to revise
and restructure the flawed business model because they knew it would never make
money.
(p) Enron represented that it successfully managed its balance sheet by effectively
hedging its merchant investments and placing billions of dollars of non-recourse debt in related but
independent parties. In fact, the hedges were illusory, not real, and were largely dependent on the
value of Enron's own stock where Enron still was exposed to the risk of its merchant investments.
In fact, that debt was not non-recourse because if Enron's credit rating was downgraded that debt
would become recourse as to Enron. This was an extraordinarily dangerous situation for Enron
because, in fact, based upon its true financial condition, which was known to its insiders, Enron did
not deserve the investment-grade credit rating it was carrying and it was in constant and precarious
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