‘Can you get it in writing?’
‘I’ll try.’
Throughout February and March we discussed with Malcolm Rifkind, the transport secretary, the question of the disputed Tokyo frequencies and our access to Heathrow. He was a down-to-earth Scot who gave us a very fair hearing. I really felt that he was on our wavelength when he pointed out how vastly improved the Heathrow–Glasgow shuttle was:
‘I now get a decent meal with proper cutlery,’ he said. ‘It used to be a damp little white sandwich.’
‘That’s British Midland bringing in some competition,’ I pointed out. ‘They’ve got the slots to do it from Heathrow.’
I thought our lunch meeting had gone well, but right at the end he floored me:
‘Richard,’ he said. ‘You must admit that BA does do an excellent job.’
‘Yes, they’re much improved,’ I agreed. ‘But they have been given everything on a plate: for instance they were given Concorde for nothing with all the debts written off, and they were given the exclusive use of Heathrow.’
‘They were,’ Rifkind admitted. ‘But it’s all in the national interest.’
Silence fell between us. To my mind he had just undermined the entire lunch.
‘There’s no national interest at stake here,’ I argued. ‘British Airways is just a large airline which is owned by its shareholders. It happens to have a monopoly because that’s what it was given while it was nationalised. But it’s no longer like Aeroflot. Think of your old white sandwiches on the Glasgow shuttle. And, unlike other privatised monopolies, which have their market dominance reduced by regulators, BA has no regulator and has actually been allowed to increase its dominance since it was privatised.’
I thought that I might have gone too far because Malcolm Rifkind nodded rather awkwardly and made his way to the black Rover outside. I knew that he’d never flown Virgin because all members of parliament, all civil servants, all soldiers, were still encouraged to fly British Airways as if it was somehow still the ‘national carrier’. As I watched his car head off back to Westminster, I wondered whether he really believed that British Airways operated in the national interest or whether he had just been playing devil’s advocate.
‘Good news, Richard,’ said Malcolm Rifkind on 15 March 1991. ‘I am pleased to say that the government is going to allow Virgin Atlantic to operate from Heathrow. And, on top of this, we are also going to nominate you as the British carrier to operate the two extra flights to Tokyo.’
It was the crucial turning point we had been waiting for.
‘Fantastic news!’ I shouted. ‘Penni, let’s have some champagne! Call down Will. Call down everyone!’
As everyone gathered in my office to celebrate, I dialled Hugh Welburn’s number. Hugh had written a paper that pointed out the critical importance for an airline of operating from Heathrow. The paper’s conclusion was that, due to the single short runway at Gatwick and the lack of connecting flights, an identical route from Heathrow would be 15 per cent more profitable than one from Gatwick. Hugh’s paper, and the revelation that Virgin would be able to fly more cargo from the longer Heathrow runways and thus earn more taxable revenue, had made a powerful impression on Malcolm Rifkind.
‘We’ve won,’ I told Hugh. ‘Well done. We’ve finally managed to get into Heathrow.’
Hugh was delighted and amazed. He had been a consultant in the aviation industry for a long time, and he had seen the demise of British Caledonian and several other smaller airlines that had failed to make ends meet from Gatwick.
‘This is your breakthrough,’ he said. ‘But watch out. British Airways won’t like it at all – they’ll go berserk.’
As we drank champagne, the telephone started ringing with calls from journalists who had picked up the story. They were also ringing up Lord King, and the following day and over the weekend I read his reaction with interest:
‘Government transport policy?’ Lord King snorted in the Observer, of which his son-in-law Melvin Marckus was the business editor. ‘What transport policy?’
I didn’t know whether to laugh at the interview or be annoyed. I read on with growing amazement:
‘It seems that every time we build up a profitable route,’ Lord King went on to say, ‘someone comes along and says, “I’ll have some of that,” and the government obliges.’
Lord King estimated that Malcolm Rifkind’s decision to allow Virgin Atlantic to fly the extra two flights to Tokyo would cost BA around £250 million a year in lost revenue: ‘That is £250 million of revenue lost to our public shareholders which has gone straight into Richard Branson’s back pocket,’ he fulminated.
If only revenue did go straight into my back pocket. Perhaps in his rage Lord King had forgotten that there are costs that unfortunately crop up between revenue and profit.
On the same day the Sunday Telegraph commented:
This week Lord King was breathing fire over the decision finally to allow Virgin into Heathrow. Its long confinement at Gatwick has been a boon to BA and now I can see why. British Airways’ approach to its services is hidebound by the managerial thinking of a national airline while Virgin has all the cheek, determination and original thinking of the whippersnapper entrepreneur snapping at the heels of the giant conglomerate. In terms of food and service, upper-class Virgin is like first class.
In the Observer Lord King argued, no doubt with a straight face, that each time the government tried to foster a strong second airline it ended in disaster. He gave the examples of Laker Airlines, British Caledonian and Air Europe. This was stunning hypocrisy. British Airways had helped push Freddie Laker out of business – a grand jury was empanelled to look into the issue but, ultimately, no charges were brought after the intervention of the UK and US Governments. All three airlines had been confined to Gatwick. British Airways championed the benefits of competition, as long as the competition stayed out of sight at Gatwick.
My parents had always drilled into me that the best motto to follow is ‘Nothing ventured; nothing gained’. By fighting tooth and claw for access to Heathrow, we had finally won. Virgin Atlantic was still tiny in comparison with British Airways, but we were now a serious threat to their long-term future in a way that British Caledonian had never been.
The demise of PanAm and TWA was also to play a role in the question of our access to Heathrow. American Airlines and United Airlines, the two giant American carriers, moved in to buy the rights to the routes into Heathrow that PanAm and TWA had operated. In order for these routes to be activated, the two airlines asked for the Heathrow slots to be transferred over to them. Under the strict letter of the Traffic Distribution Rules these slots could not be transferred but should revert to the Heathrow Slot Committee. We immediately argued that, if this should happen, then Virgin Atlantic should be allowed to apply for them alongside all other carriers who were interested in flying from Heathrow. Although Malcolm Rifkind had opened up Heathrow in principle, we still had a battle on our hands over how we would actually get the slots to fly from there.
The letter I had asked Chris Moss to try to extract from the British Airways employee, Peter Fleming, came through on the following Monday morning. It added to my sense of unease. Dated 18 March, Peter Fleming’s letter said:
There is no doubt that BA’s UK sales management had Virgin as public enemy number one. The real crisis was precipitated by the high profile Richard Branson achieved during his campaign to return hostages from the Gulf. During this period I was debriefed from a UK sales management meeting and told that a management team had been set up to undermine the ‘Branson image’.
The development of actions in the European Courts [Virgin had put in a formal complaint] has however precipitated a thorough ‘cover-up’ of activities. In the last few months at BA I was told on three separate occasions to destroy ‘any reference to Virgin in [my] files’. Staff in sensitive areas have been briefed on ‘anti-trust’ laws and how to respond to a sensitive situation involving Virgin. Actually, the curre
nt situation is verging on paranoia!
Peter Fleming had been a senior marketing executive based at BA’s Victoria office. This was the first real intimation I had that British Airways had actually set up a special internal unit to discredit me, and had ordered the shredding of documents relating to Virgin. Why were those documents so incriminating that they needed to be shredded? I decided to put Peter Fleming’s letter on file while we watched to see how the British Airways campaign, which became known as their ‘dirty tricks’ campaign, developed.
In the meantime, we had plenty to do. If Virgin Atlantic was going to operate from Heathrow, we had to set up check-in desks, baggage handlers, an engineering team, and of course we had to have a working timetable to offer our passengers. This meant being allocated slots. Only when we had the slots in place could Virgin Atlantic set up a timetable and then sell tickets. If we were going to benefit from the busy summer traffic we had to have these in place by April at the latest. Every single item was a battle. It was only through battling ferociously, and saying that we would take the entire issue of slot allocation to the European Commission, that we were eventually given the slots we needed.
While I was locked in my debate with the Heathrow Slot Committee, Jordan Harris and Jeff Ayeroff, who ran our American record label, called me to say that Janet Jackson had told them she would like to sign up with Virgin Music. This was as sensational a breakthrough for Virgin Music as winning access to Heathrow was for Virgin Atlantic. Janet Jackson was the world’s top female singer and I recognised that she had the single-minded determination to stay at the top. She wanted to become even more successful than her brother Michael. Alongside talent, one of the deciding factors in a singer’s success is their mental strength. And Janet had plenty of that. She had built up her success over a number of records. In many ways it is better for a band if they take a long time to build their success since they can then learn to live with it, and they have a broader, more loyal, fan base.
Although Janet told me that she would like to sign with Virgin, there was still to be an auction for her and Virgin would have to match the highest offer before her preference for us would swing it. It was going to cost far more money than we had at our immediate disposal, but I instinctively knew that we had to have her: signing Janet Jackson would confirm Virgin’s position as the world’s sexiest record company. I was damned if I was going to let the caution of our bankers stop us.
Throughout my business life I have always tried to keep on top of costs and protect the downside risk as much as possible. The Virgin Group has survived only because we have always kept tight control of our cash. But, likewise, I also know that sometimes it is essential to break these rules and spend lavishly. The chance of signing Janet Jackson was one of these moments: she could not be missed. After talking with Simon and Ken, I decided to offer Janet the largest amount of money ever to be offered to any singer. On top of this, I decided to break all the rules of the record industry: rather than tying her down for a number of future albums, Virgin would offer her a contract for just one album. This was virtually unprecedented. I wanted to blow away the competition. I felt confident that once Janet started working with Virgin she wouldn’t want to go anywhere else.
As well as cementing Virgin Music’s position as the best record label, signing Janet Jackson would send out the right message to all the people in the City and the CAA who might believe the British Airways rumours that the Virgin Group was suffering a cash crisis.
The only trouble was that we were indeed suffering a cash crisis. I knew that we would receive no help from Lloyds Bank if I asked for an extension of the overdraft to sign her, so Trevor and I looked for ways to juggle our assets and find more finance so that we could make the down payment. After a number of rapid meetings with banks, Trevor finally won the approval of the Bank of Nova Scotia, who told us that they would fund the Janet Jackson contract.
We offered Janet Jackson $15 million, with a payment of $5 million on signature. However, the auction soon topped that and we had to jump up to $20 million and finally $25 million, just for the one album. It was millions more dollars than any record company had ever paid for a single album. We pointed out to the bank that Janet was the world’s top female singer and she had had more top-five singles from her last album than any other singer, including her brother Michael. The Bank of Nova Scotia assured us that they would stretch to the $25 million.
As good as her word, when the bidding levelled out at $25 million, Janet chose Virgin. The contract was ours for the signing and we had to find $11 million to pay her upon signature. I don’t think Janet had any idea of the effort it took to scrape the money together, or of the wild plane dashes across the world with banker’s drafts that were necessary to meet her deadline – but somehow we did it.
24 The kick boxer in the first room
April–July 1991
WE DECIDED TO PAY a huge sum – some $25 million – to sign up Janet Jackson. But such a huge debt caused alarm bells to ring at Lloyds Bank as they saw us take on board another load of debt, Trevor and Robert managed to sell the European licence to distribute Sega computer games back to the parent company, Sega in Japan. We needed the cash and we needed to show the outside world some of the hidden value within the Virgin Group. None of the bankers had put much value on the licence, but we sold it for £33 million. The sale was also perfectly timed: a year later the bottom fell out of the computer-games market, and the yen soared, which would have sliced the value of the licence to practically nothing.
Virgin had acquired the European licence to distribute Sega games in 1988, when we bought the company who owned it, Mastertronic. At the time we had little idea of the potential of the computer-games business. All I knew was that Holly, Sam and their friends were suddenly spending a lot of time playing computer games on the television. While Trevor was at MAM he spent time with Sega as he leased out their arcade machines. He felt sure that Sega would be able to draw upon their software expertise to rival Nintendo, and that their new portfolio of small machines to play with at home would sell well. It seemed like a good business to get into.
Mastertronic was only five years old. Frank Hermann had set it up in 1983 and acquired the rights to a number of computer games. At that time he distributed these games, which were on cassettes and played on consoles, through newsagents. Frank noticed that a new games series manufactured by Nintendo was selling well in America. He tried to sign up the licence to distribute Nintendo in Britain, but Nintendo had already signed it to Mattel, a large toy manufacturer. Nintendo had a 95 per cent share of the computer-games market in America, so Frank went to see its only other competitor, Sega. He signed up to become Sega’s British distributor in 1986, and in the first year his company managed to sell 20,000 Sega Megadrives.
The next year, 1987, Mastertronic’s sales of Sega were soaring but, given that Sega were charging £55 for a console, Frank needed a partner to finance the sales. Although he could sell the consoles for £99, he needed a large amount of working capital to finance the gap between the £55 outlay to Sega for supplying the console, which was cash in advance, and receiving the £99 from selling it.
In June 1987 I was telephoned by Roger Seelig, who asked me to come and meet a friend of his, Frank Hermann, who had stumbled into this rather amazing business. Trevor and Simon Burke negotiated to buy a 45 per cent stake in Mastertronic, and we put it in with Virgin Communications. Frank and Robert started working together and they bought the licence to distribute Sega in Spain, France and Germany for five years. Their challenge was to build the Sega name from scratch in Europe. Virgin marketed Sega as the cool game to play, and initially we sold it on the basis that, while your younger brother may be happy with Nintendo games such as Super Mario and Gameboy, the smarter games for smarter kids were ones such as Sega’s Sonic the Hedgehog. Then, as the market developed rapidly, we found that younger and younger boys were buying Sonic: they all wanted to be like their older brothers. Our trick was to position Sega a
bove Nintendo and force them further and further downmarket. And it worked: in Europe Sega overtook Nintendo with a 45 per cent market share, compared with a tiny market share back home in Japan.
By 1991 the sales of Sega in Europe had soared to £150 million, up from £2 million in 1988. By then we were beginning to be rather terrified that the bubble might burst. In order to maintain our position we were having to spend £70 million marketing Sega each year, before the cost of financing the sales. There was always the danger that, because these games were primarily sold to an extremely narrow section of teenage boys, if another craze came along out of the blue, then Sega’s sales would collapse. Peer pressure ensures that nobody wants to be left behind for a moment.
At home I noticed that Sam and Holly began to grow bored with their computer games. They spent less time tapping away at their consoles and Gameboys. Sam began to listen to music more, and Holly began to do other things. Just as they had turned us on to the idea of buying into this business, so Holly and Sam gave us the first warning signs that the market was topping out. If we stayed in the business we would have to commit to another huge budget for promoting Sega. It was time to sell.
The sale of the Sega licence surprised both the outside world and our bankers: £33 million in cash had been conjured up for a business on which they had placed no value. This was over ten times our original purchase price.
Before starting discussions to sell the Sega licence, Robert had hived off the small team who wrote the software programmes into a separate company called Virgin Interactive. In 1990 the next wave of technology would be games which were played on compact disc, and Robert commissioned a number of software writers to come up with programmes for CDs. Without Sega and Sonic the Hedgehog to worry about, the tiny team of software programmers that Robert had assembled in America began to devise a new game for CD-ROM technology. They named it ‘The 7th Guest’, and I noticed that people were growing increasingly excited about it. It was a game that involved battling your way through a haunted house while all kinds of attacks were launched at you without warning.
Losing My Virginity: How I Survived, Had Fun, and Made a Fortune Doing Business My Way Page 30
