|HOME||MEDIABIZBLOGGERS.com||WOMEN in MEDIA||HOOKED UP||MEMBERSHIP INFO||MEMBER COMPANIES||MEDIA BUSINESS REPORT||ECONOMIC FORECASTS||RESEARCH|
Published: November 5, 2007 at 02:06 AM GMT
Last Updated: November 5, 2007 at 02:06 AM GMT
Speaking from the Grave… When Enron Seduced the Media Industry: In early 2000, high-flying energy, pulp and paper company Enron had been meeting with media executives to introduce their hedge model to the advertising industry. Their team had met with much scepticism and a wary but positive reception. The Enron scandal was still months away from unfolding when Jack Myers Media Business Report hosted the industry's first forum on media buying and selling exchanges. Following are excerpts from the presentation made that day by Edward Ondarza, the Enron executive who was spearheading the company's foray into the media industry. I leave it to you to form your own judgements about the validity of Enron's propositions and how many of their proposed services are either being instituted today by others and/or would be more viable in today's media climate.
Jack Myers: "Edward Ondarza leads Enron Media Services and there are a lot of questions in this industry right now about what is Enron doing in the media business. Enron Media Services is a subsidiary of Enron Broadband Services, and I won’t even try to explain, Edward, what you are doing in the media industry, given your experience in the pulp and paper industry, but when we met a few weeks ago, you actually did an excellent job of explaining to me the compatibility between pulp and paper, oil, petroleum and media. And I, for one, am fascinated to learn more about that."
Edward Ondarza: "I am sure many people are shaking their heads when he’s talking about pulp and paper, and crude oil and media. But let me start off with just the three things that I wanted to accomplish. One, give you a broader perspective of who Enron is and what we do. Two, very importantly, talk about what we are not doing in the media business, because I think that this is one of the problems that has existed for us with the press that has come out and just gossip in the market about what we are doing and what we are not doing. And then third, just give you a quick perspective of the types of transactions and the focus that we have in this [media] marketplace. …
Let me talk about what we are not, and then I will get back into what we are, because I think that’s very important because of the misconceptions. We are not an online exchange, to start off with, but we will have these financial products on an online market at some point time. Nor are we a physical broker or a reseller of time and I think that’s what most people perceive as us being today. What we are not doing, we are not going to ABC or The Wall Street Journal or to a magazine or to a radio station saying here’s a hundred million dollars from Enron, and for this hundred million dollars, I get a call on your physical inventory, and I’m going to go stand on a corner out here in New York and talk to all the advertisers and try to sell them components of your inventory. That is not what we are doing. Nor are we trying to compete on a price basis head-to-head for a show. We are not standing out and saying we have a [Who Wants To Be a] Millionaire on Tuesday nights at 8 pm at 10,000 dollars cost per point; that is not what we are doing. When we are going to the owners of advertising, we normally have an advertiser. We are going and saying our customer is Enron or Coca-Cola, or Ford, this is what they are interested in buying and we negotiate the price for what those companies are interested in buying. Then what we do is we sit down with the seller of this media and we say ok, how do you want to structure this? How do you want to sell it? Do you want to sell it on a fixed price basis, or do you want to sell it on a floating price basis, or a combination? Do you want a floor embedded in that, or do you want it again floating? How do you want to receive the stream of revenue? We sit down with Coca-Cola or Ford and we do the same thing. Do you want it on a fixed price basis? Do you want it on a floating price basis? And what do you want that revenue stream to look like? We even have financial structures that will finance advertising budgets over periods of time. Now many people say, well how do you do that, does that work, is it legal, does it work with any of the FCC rules? And the answer is yes. We spent a lot of time with the accounting agencies and with our regulatory individuals researching all the different products that we are offering.
Enron on Working with Media Agencies
Question from Jack Myers. "I am sure there are some in the audience who would prefer not to applaud for what you are doing, but what happens to the media buying service? We have a panel coming up in a minute of media buyers, what’s your relationship with them?"
Answer. from Edward Ondarza: "Sure, obviously they will still exist and still do very well. I think in some situations the media buyers view us as a competitive threat, when we are actually doing the physical execution of media, and in fact we have met in Houston with several and we have visited several of the companies here in New York and Chicago, and LA, about how we can, to some extent, co-exist. Because there are products and services that we can lend to everyone that are just financial in nature, and as we have, the media buyers may not like this, the way I am putting this, but as we have, in other markets, brokers who bring us transactions. Enron, yearly, pays around 600 million dollars to brokers in the energy markets, in the pulp and paper markets, in the credit markets and every market we exist in. We believe that we are able to co-exist with the media buyers and pay them a brokerage’s fee for any transactions they work on with us, and that we help structure together."
Enron on Advertising Agencies
We are not an advertising agency. We will never be involved on the creative side or the media planning side. We are strictly focused on the execution of media, the financial component. And the way we like to look at this business, this is very much about advertising, there is no question about it, but what we are here to do, is to affect the financial performances of the individual companies, using advertising as ad medium. By using different financial structures and risk management tools to enable the companies to perform better financially. At the end of the day, that’s why we are all here. So we can all help our companies do better financially and that’s what we focus on, no matter what business Enron’s involved in. And then the thing that I am sure will come up throughout the day, is the commoditization of advertising.
Enron on Commoditization of Advertising
[Commoditization of advertising] is not our focus, nor does it need to be the end result for us to be successful. We are bringing the three core competencies that Enron focuses on. And those are market making, or trading, risk management and finance. And we bring those three core competencies to this market and those are the similarities that Jack was alluding to that we discussed at breakfast. It’s not about building online exchange and trading ---- as a commodity, but bringing these financial structures in a different financial mindset to this industry that can be completely scalable, we can take it from one industry to another, which as a company I think we have proven very well. And a few people said, well, this is not a commodity, it will never work what we have found, one of the hardest things that we have to deal with are the misconceptions that exist in the market place, but once we are able to sit down with the corporations, and normally we sit down both the financial management and marketing, if it’s a seller of advertising, or financial management and the media group, if it’s a buying group, and talk about what we are capable of executing and incapable of executing on a physical side, and then the types of structures that we can offer to the company from a financial stand point.
Q. from Jack Myers: "So, you are suggesting that media and agencies should be partnering with you, or meeting with you to discuss how you should work together to reach your mutual goals?"
A. from Edward Ondarza: "I think that’s important, I think to the very least extent, what’s important to us, is not necessarily that we are doing business with everybody in this room, but what is important to us, which I may not have communicated clearly today, is for you to understand what we are doing, and what we can do, what we are capable of doing. Because I think once you understand that, you may not have an application at this moment, but the next time an issue comes up, which inevitably will, you can say: "Hey, I can call these guys, because these guys have some options that we are not capable of executing, or we’ve never thought of.""
Enron and the Media Barter Business
Another part of our business, again, is focused on these barter transactions, which I have mentioned to you, and we have found them to be very helpful in the way that we can structure these different opportunities. And again they range everything from a magazine, newspaper or a network buying bandwidth from us for streaming, to working with a company that sells crude oil. We can buy a vessel of crude oil and return media. We can buy bandwidth and return media. We can buy telecommunications equipment and return media, or anything that we can basically monetize. And not all of our transactions are focused on that, but it seems right now, a large portion of the transactions we are working on today, do involve a component of a barter transaction. And then the other difficult part about our business, I am sure a lot of people are questioning, is when we talk about physical and financial. There are ways for us to provide these financial products and services to the market place, without getting involved in the actual physical purchase or execution of the media. And where we are involved in the physical purchase of the media, the way it is working with some of the larger companies, we are working with some companies that have billion dollars advertising budgets, what they are doing, is they are very interested in what we have to do and the way we can affect their businesses, so they are actually carving out a component of their advertising budget, that they are comfortable with us executing. If it is a highly placed, highly targeted advertising campaign, that’s not a place that we can necessarily be very effective. But in other components of people’s advertising budgets, we have found a place within all of them that we can exist. And for another company that has approximately a 30 to 35 million dollars budget, we are doing a 100% of what they are looking for. And again the reason why there is a lot of interest in what we have to do and what we have to say, is because again, we are affecting the bottom line in financial performance, which is again why we all exist at some extent."
For one example, we have a client we are working with, and we may be buying bandwidth from them, for our broadband business, and a component of that bandwidth, instead of paying them in cash, yes a portion of it will be returned to them in media. And then on the flip side, either a magazine, a radio station or a network, which we are working with all three, we maybe providing our backbone or a streaming service to them, and again to them, instead of them paying us in cash, they are giving us media or a component thereof. But what we are doing that’s different from a barter house is we are not relying upon another customer taking that product or service from us. We are immediately monetizing what we are buying or what we are selling. So if I am working again with Coca-Cola, and I have a barter transaction with Coca-Cola, I am not worried about taking Cokes and trying to go to ABC and give all their executives Coca-Colas to drink. I am going to monetize my position with Coca-Cola and then use my cash or capital to go buy the inventory that they are interested in buying.
Enron on Interactive Television
Q. from: Mr. A. Pontano from Filter Media. "We are an enhanced television strategy group and I happen to be a former power trader myself. It seems that ITV is potentially one of the more speculative markets in the forward terms, in terms of ad sales market size. Do you have any plans for an ITV risk offering and how forward is the market that you project, 2004-05?"
A. from Edward Ondarza: "Sure, on a financial basis, we are making a forward market five years. So today, we will make a price for you up to the end of 05. And the two spot markets on the cable for the network cable and for the network broadcast television markets as well. We will be putting this online very soon, just the financial components. But, we are not going to be putting, for example, ER online, at a set price, in a certain market place, anytime soon. That’s not our plan. And as a company we have a lot more to learn about your business, trust me, before we believe we can build an effective exchange, applying what we’ve learned in our other markets."
Q. "Specifically, do you have an intention of applying an enhanced television product (Interactive Television and Enhanced)?"
A. "Well, we have currently released this video on demand offering with Blockbuster, I am not trying to sound like a commercial, but there will be components of interactive TV embedded in that offering, and that’s being worked on currently. But that is separate from my business."
Enron on TV Ratings
Q. from Georges Hayes of Universal McCann. "Can I ask, from a media buying point of view, once you make the initial transaction, what other services beyond that do you provide in terms of, stewardship for example, or ongoing upgrading, etc. etc.?"
A. from Edward Ondarza of Enron: "Well, we will be managing the buying execution in-house, many people say: "Well are you guys capable of doing so", and the answer is: Absolutely. We have, if any of you out there have been to Houston, or you are welcome to come visit us, we have floors of people that do nothing but executing transactions. Everything from crude oil and gas to weather, to bandwidth, we have people that are trained in executing transactions, and I understand this is a whole different discipline, but we have hired and we are hiring individuals from your market place to help train our individuals. Now something else that we are doing, that we find very interesting that so far, the companies that we’ve talked to are extremely excited about, is we manage the, let’s talk about television, the rating points, on an overnight basis, we have a formula based structure that we are working on with the broadcasters who are delivering us the rating points, and we manage them on an overnight basis, as well as to the customer, so they can see where they are, either long or short, relative to what they have purchased, and what will or will not be make good under the contractual structure."
Enron on How The Media Deal Was Going to Work
Q. from PriceWaterhouseCoopers: "My question is, with the five year forward market that you want to make, in a perishable commodity, where physical is not going to be very easy for you to control, how are you going to hedge your portfolio risk, the reason it’s relevant is, you know, given your value of risk being so high, most of the margin will have to be passed on to the people who transact. So how is this going to be attractive to somebody?"
A. "Let me make sure I understood your question. You are asking how we are going to manage our position risk? Ok, currently, right now, with a broadcaster, we are working on over a billion dollar hedge, and that’s a two year position for a specific market. And the way that we manage our positions, at Enron, we are not building some markets, we do not necessarily speculate on markets, every group has a volumetric limit, and another limit called VAR, value at risk, and that value at risk is a multi market position relative to our law---- position, I am getting into a lot of stuff that you don’t care about, but what I am trying to tell you is that we are not necessarily going out there, or we are not, specific to this business, speculating on a position I am not going to take that billion dollar position from that broadcaster, without letting off the risk. We have a number of advertisers who we met, and financial management, who are interested in managing their financial risk on a forward basis. So we are off setting those positions. And where we do not have a perfect hedge, we have a basket of positions that has a high number --- of correlations, that we can manage the risk position for a short period of time until we can manage that. But everything we do is tightly controlled, we may not be able to take on that perfect position that I mentioned, we may only be able to take on a component of it, and maybe in 2-3 weeks, or 2-3 months, I can take an additional component, but on the initial stages of this business, which is where we are with this business, it is very difficult, because it’s very blocky initially. Because we have to get the long position after the short position, but once we build a book, then it’s a much more fluid market as we have proven in our other businesses.
Enron and Media Risk Management
Q. from Jack Myers: "What percent of the media business would you expect to fall under the risk management type of system?"
A. from Edward Ondarza of Enron: "One hundred percent! I am just kidding, no, this is something that takes a long time, we don’t kid ourselves, it takes a while for companies to get comfortable with the products that we offer, the way these transactions are structured and how they affect their businesses. And as you heard today, things that are new, are sometimes difficult to take in and understand and get comfortable with. And that is a big part of what we are doing these days, is education, explaining how it works. We hope that, I believe with the transactions we are looking at today, that we can physically execute between three-quarters and a billion dollars of media business in the year of 2000. With the companies that we are talking to today, and the types of budgets that they are showing us, that they want us to execute, which in many cases are components of a larger budget.
Q. from Jack Myers: "Can you share with us any of the advertisers that you are working with?"
A. from Edward Ondarza: "Not yet, obviously it would be in my advantage to do so… but we are working under close non disclosure agreements… and many companies are not comfortable necessarily, publicizing that they are working with us initially, because of the backlash they may receive in one of many forms, that they are concerned about, but as soon as we are capable of doing so, we will make it public.
[The above transcript has been edited but the context has not been affected. The full transcript will be published soon as an audio podcast at www.jackmyers.com]
We enjoyed The Great Christmas Light Fight on ABC last night. The show has four families competing each week for 50K. A guy named Michael Maloney is the judge. Never seen him before, but he's REALLY into Christmas. Michael goes around the country judging Christmas lights. Not a bad gig at all. He gets driven around by Santa in a red ‘65 Impala. First stop was Whitestone, NY, where Kevin Lynch and his family -- Tina, Tara, Tori and Timmy -- help to decorate. Kevin is a retired firefighter and 9-11 first responder. He has some crazy Christmas spirit and obviously LIVES for this time of the year.Read More
I no longer read business books. Been there, done that for too many years. Stimulation comes from reading many other sources. My current obsession seems to be evolutionary theory. And there are few better to read than Stephen Jay Gould. I prefer him to evolutionary reductionists just as I push away from all sorts of reductionism in every field imaginable. There is a psychological matrix that all reductionists share. I just don’t fit that mold I guess. Online marketing is presently overwhelmed with marketing reductionism.Read More