Enron-Blockbuster Partnership

On July 19, 2000, Enron Broadband Services announced a 20-year exclusive partnership with Blockbuster Inc. to deliver movies on demand to American homes over Enron’s fiber-optic network. The deal was hailed by Wall Street analysts as confirmation of Enron’s technology ambitions. Merrill Lynch wrote that it “confirms the tremendous inroads Enron has made in the telecommunications business.” Eight months later, on March 9, 2001, Blockbuster terminated the relationship, citing insufficient “quantity and quality of movies.” The service had launched as a pilot in four cities in December 2000 and generated virtually no revenue.

During those eight months, Enron booked $111 million in profits from the deal: $53 million in Q4 2000 and $58 million in Q1 2001. The profits were manufactured through mark-to-market accounting applied to 20 years of projected future revenue, monetized through a special purpose entity called Project Braveheart in partnership with the Canadian Imperial Bank of Commerce (CIBC). Federal prosecutors later proved at trial that “the Blockbuster deal generated virtually no revenue for Enron and was canceled in March 2001.” Four executives were convicted or pleaded guilty in connection with the scheme. CIBC was fined $80 million by the SEC and paid $2.4 billion in a class action settlement.

The Enron email corpus contains 1,190 messages mentioning Blockbuster, spanning January 1999 through November 2002, with the heaviest concentration during the July 2000 announcement period.

The Announcement

Negotiations and Ken Lay’s Involvement

The Blockbuster partnership was signed in or around April 2000, though its formal public announcement was delayed until July. The contract established a 20-year exclusive agreement for Enron Broadband Services to stream video content directly to customers’ homes using Enron’s fiber-optic network, with Blockbuster providing the content relationships with Hollywood studios.

Ken Lay personally participated in the final negotiations. On July 14, 2000, Kelly Kimberly, the communications lead handling the announcement, sent an email to senior EBS leadership confirming the deal was days from going public.

The joke about being fired carried an undertone of real pressure. The EBS division needed a marquee deal to justify the stock price gains Enron had enjoyed from its broadband ambitions, and the Blockbuster partnership was meant to be that deal.

The Public Announcement (July 19, 2000)

Five days later, Enron sent a company-wide announcement declaring the partnership to all employees.

The company produced a webcast featuring Ken Lay and Blockbuster CEO John Antioco to explain the partnership to investors and the public. The vision was straightforward: Enron would provide the network infrastructure, Blockbuster would provide the content relationships with studios, and consumers would pay to watch movies on demand from their televisions.

Market Reaction

Two days after the announcement, on July 21, 2000, the Office of the Chairman sent a management email to all employees citing the deal as validation of Enron’s broadband strategy. The same email announced Kenneth Rice’s promotion to CEO of EBS, replacing Joseph Hirko, who had served as co-CEO since the unit’s formation.

The timing of Rice’s promotion alongside the Blockbuster announcement was deliberate. Hirko, the original CEO of Enron’s broadband unit, declined to relocate to Houston and left the company in July 2000. Rice, who had previously served as CEO of Enron Capital and Trade, became the sole leader of EBS at the moment the division appeared to be reaching its commercial breakthrough.

The Technology

The Streaming Platform

The service was designed around a relatively simple concept: movies stored on servers would be streamed over Enron’s fiber-optic network to set-top boxes in customers’ homes. On September 5, 2000, EBS announced the selection of nCUBE as the video streaming platform. The announcement was timed for the International Broadcasting Convention (IBC) in Amsterdam, where Enron and Blockbuster were exhibiting together with nCUBE.

In December 2000, the pilot service launched in four cities: Seattle, Portland, Salt Lake City, and New York. Subscribers in those markets could, in theory, order and watch movies on demand through the Enron-Blockbuster platform.

The Reality

The technology did not work reliably. While the March 2001 termination email would claim that “today subscribers are buying movies on-demand using the service we created,” this assertion is not corroborated by any evidence of meaningful subscriber numbers, transaction volumes, or revenue in the Enron email corpus. The pilot remained small-scale, the content library was limited, and the streaming quality was inconsistent.

The fundamental problem was twofold. First, Enron’s fiber-optic network, despite ambitious claims about its Enron Intelligent Network and Broadband Operating System, was not capable of reliably delivering streaming video to homes at scale. Federal prosecutors later proved that EBS had exaggerated its network capabilities to analysts and investors. Second, Blockbuster could not deliver the studio content needed to make the service attractive. The major Hollywood studios were reluctant to license their content for digital streaming in 2000, and the “quantity and quality of movies” never materialized.

By October 2000, before the pilot even launched, Enron’s internal newsletter was already running articles about the “Hidden value of the Blockbuster deal,” suggesting that the company’s focus had shifted from making the technology work to extracting accounting value from the contract itself.

Project Braveheart

The Structure

In December 2000, Enron created a special purpose entity called Project Braveheart to monetize the Blockbuster contract. The structure was a Total Return Swap (TRS), catalogued internally as part of the “Hawaii 125 Series” of structured finance deals.

On December 19, 2000, Vince Kaminski’s risk management group received a notification about the new transaction.

The naming convention – Hawaii 125, McGarret, Danno – referenced the television series Hawaii Five-O, a pattern consistent with how Enron’s structured finance teams named their SPE families. A January 9, 2001 email further listed Braveheart as “Hawaii 125 Series… H(Braveheart) (New)” among Total Return Swap deals used “to monetiz[e]” various assets.

How It Worked

Under the Braveheart structure, CIBC invested $115 million into a partnership entity in exchange for a 93 percent share of Enron’s profits from the Blockbuster video-on-demand deal. The $115 million from CIBC flowed to Enron and was recorded as revenue. In return, CIBC would receive the vast majority of profits from the 20-year streaming contract – profits that Enron projected using mark-to-market accounting applied to two decades of future revenue from a service that had been operating for days.

The structure allowed Enron to recognize the present value of 20 years of projected revenue immediately, rather than waiting for actual customers to order actual movies. Mark-to-market accounting, which Enron had received SEC approval to use for its energy trading business, was applied to a consumer entertainment service that had no track record, no proven technology, and no demonstrated demand.

The Phantom Profits

Using this structure, Enron booked $53 million in profits in the fourth quarter of 2000 and $58 million in the first quarter of 2001, for a total of $111 million. The revenue was recognized from a deal that, as the DOJ established at trial, “generated virtually no revenue for Enron.”

The $111 million figure represented the discounted present value of 20 years of projected profits from the Blockbuster contract. The projections assumed the streaming service would scale to millions of subscribers across the United States, generating consistent and growing revenue over two decades. At the time these profits were booked, the service was available in four pilot cities, had an unknown but negligible number of subscribers, and relied on technology that did not work reliably.

Kevin Howard, the EBS finance executive who structured the accounting, was later convicted of “deliberately circumvent[ing] applicable accounting requirements and mislead[ing] Arthur Andersen accountants in order to allow Enron to fraudulently record $111 million in revenue in 2000 and 2001.”

The Termination

On March 9, 2001, Kenneth Rice and Kevin Hannon sent a company-wide email announcing the end of the Blockbuster partnership. The email framed the termination as a strategic decision rather than a failure.

The email acknowledged that Blockbuster had failed to deliver adequate content while simultaneously claiming the technology had been “proven.” The characterization of the termination as expanding the business rather than losing a partner was consistent with the broader pattern at EBS of reframing setbacks as strategic pivots. Enron never launched an independent video-on-demand service.

The deal had lasted approximately eight months from announcement to termination. During that time, the company had booked $111 million in profits from it.

The Criminal Case

Indictments

On March 26, 2003, a federal grand jury in Houston indicted Kevin Howard and Michael Krautz, Enron Broadband finance and accounting executives, for “faking $111 million in earnings from a failed video-on-demand deal with Blockbuster.” The charges included securities fraud, conspiracy, wire fraud, and falsification of books and records.

The indictment detailed how Howard and Krautz had structured the Braveheart transaction specifically to manufacture earnings that could be booked immediately, and how they had misled Arthur Andersen auditors about the nature and substance of the transaction.

Guilty Pleas

Kenneth Rice, CEO of Enron Broadband Services, pleaded guilty to securities fraud on July 20, 2004. His plea covered the broader pattern of fraud at EBS, including exaggerating the division’s network capabilities and performance to analysts and investors. Kevin Hannon, COO of EBS, pleaded guilty to conspiracy in August 2004 for “scheming with other executives to exaggerate Enron’s broadband network capabilities to impress analysts and inflate company stock.”

Trial and Conviction

Kevin Howard was convicted on May 31, 2006, on charges of conspiracy, wire fraud, and falsification of books and records. The DOJ stated that “evidence presented during trial proved that Howard deliberately circumvented applicable accounting requirements and misled Arthur Andersen accountants in order to allow Enron to fraudulently record $111 million in revenue in 2000 and 2001.” The trial established definitively that the Blockbuster deal had generated virtually no actual revenue.

Sentences

CIBC Penalties

The Canadian Imperial Bank of Commerce, which had invested $115 million in the Braveheart entity, faced its own legal consequences. On December 22, 2003, the SEC fined CIBC $80 million for its role in manipulating Enron’s financial statements. On August 2, 2005, CIBC paid $2.4 billion to settle a class action lawsuit – one of the largest such settlements in the Enron litigation.

Timeline

Key Evidence from the Email Corpus

See Also

• Enron Broadband Services – The division that executed the Blockbuster deal
• Kenneth Rice – CEO of EBS who pleaded guilty to securities fraud
• Joseph Hirko – Original co-CEO of EBS who left before the deal collapsed
• Ken Lay – Enron Chairman who personally negotiated with studios and Blockbuster
• Mark-to-Market Accounting – The accounting method used to book 20 years of projected revenue immediately
• Special Purpose Entities – The structured finance vehicles, including Project Braveheart, used to monetize the deal
• Vince Kaminski – Head of risk management whose group was notified of the Braveheart TRS
• Enron Bankruptcy – The eventual collapse of the company
• Andrew Fastow – CFO whose structured finance operation created vehicles like Braveheart

References

This article draws on 1,190 emails mentioning Blockbuster in the Enron corpus (January 1999 through November 2002), including 12 emails specifically referencing the Braveheart SPE. Secondary sources include Department of Justice press releases on the indictments (March 2003), Kevin Howard’s conviction (May 2006), and the sentencing of Kenneth Rice and Kevin Hannon (June 2007); SEC enforcement actions against CIBC (December 2003); class action settlement reporting from The Globe and Mail; and coverage from the Deseret News, Natural Gas Intelligence, and NBC News.