Branson: Behind the Mask (10 page)

‘We must have a party to celebrate,’ Branson had ordered, but on the night he did not appear at the venue in east London. He stayed in Necker.

Tom Alexander was celebrating. His shares were now worth about £20 million. Although his reward was a fraction of Branson’s profit, he told his friends that he was not upset.
Without the Virgin brand, he explained, the business would not have existed. ‘With hindsight, I should have been more worldly-wise. We should have got more, but I had no experience of how share mechanisms worked. We were naive, but it was not just about the money.’

Initially, the doubters were justified. Virgin Mobile gradually lost thousands of customers, and those who remained spent less than Branson had predicted. Virgin Mobile’s position deteriorated after the regulator ordered prices to be reduced by 34 per cent.

Despite problems in America and Australia, Branson planned other Virgin Mobile networks across the world. His first stop in April 2005 was India. ‘We are planning to do a lot in India,’ he announced confidently. Virgin Mobile, he told the local media, would be set up ‘in weeks’, followed by Virgin Mobile’s flotation in America ‘this year’ for $3 billion (£1.62 billion). Virgin would earn, he predicted, ‘about $1 billion’. The only mystery was the identity of the Indian partner who would agree to Virgin ‘piggy-backing on his infrastructure’ in exchange for the brand but no money. By the time he left India, Branson had still not found a partner, but nonetheless he announced that his $300 million war chest would create networks in China, Mexico, Nigeria and South Africa. After that, he said, his brand would launch in Italy, Spain and France. Operators in those countries, he claimed, were ‘ripping off customers. No one mentioned that Virgin’s bid to establish a mobile network in Singapore had just failed. Virgin had been shunned and few gave him much chance of success elsewhere.

And then came a lucky break, the prerequisite for any entrepreneur’s success, and the reward for persistence after failure.

Up till now, all Branson’s investments in the media had been disappointing. In Britain, he had failed to buy Channel 5 and several ITV franchises. He had sold his stake in British Satellite
Broadcasting (BSB) at a loss after Rupert Murdoch had established Sky. Within eighteen months, Sky had crushed BSB and had grown into a £10 billion Goliath. Branson hankered to find another way into the media. The Virgin brand attracted young buyers, but in 2007 he was flummoxed by how to exploit the buzz, because Virgin Mobile in Britain was no longer struggling. With a large number of subscribers and low costs, the profits had pushed the share price up by 80 per cent since the flotation, but in isolation the network’s fate was uncertain. Then Simon Duffy called.

Duffy had recently been appointed the chief executive of NTL, a major American cable company which had bought Telewest, an insolvent British cable network. Duffy was troubled. The original cable companies in Britain and America had been ravaged by bankruptcy. The cost of laying a fibre-optic network under the roads had wrecked the pioneers’ finances, and their problems were compounded by government regulations. Among the profiteers from the wreckage was Bill Huff, an American investor. Huff took control of NTL, which had debts of £5.9 billion, in 2003, and later rebranded Telewest as NTL. British customers cursed ‘NTHell’ for patchy infrastructure, inadequate customer service, indifferent content and confused billing, but Duffy planned to reinvent the network to provide broadband, cable television and telephones. Rebranding NTL, he calculated, would cost over £50 million. The better solution, he decided, was to forge a deal with Virgin. ‘We’ll call it Virgin Media,’ Duffy told Branson, describing how the merged company would challenge BSkyB and British Telecom. ‘You can do your normal thing taking on the big boys. Rattle their cage.’ Branson was noticeably excited. Ownership of media companies in Britain conferred exceptional status.

Underlying that scenario was a more serious proposition. Duffy knew that Branson wanted a profitable exit from Virgin
Mobile, with cash deposited in his offshore bank accounts. Until Branson could find a buyer, his profits were frozen. His business had always been to earn on the turn – he was a deal-maker, not a company manager. By merging with NTL, explained Duffy, Branson could ‘monetise’ his shares.

The temptation to grasp NTL’s offer and secure cash intensified after Duffy returned to Holland Park accompanied by Jim Mooney, the American chairman of NTL. ‘You can get in and out,’ said Mooney. ‘You’ll earn on top-line growth,’ he added, implying that the combined revenue would explode. The beauty of the cable business, Branson knew, was the cash regularly paid by subscribers. Every month, 3.3 million NTL customers paid about £43 each, and the potential for growth was huge. Although BSkyB had 8.3 million subscribers, half of British households were still not connected to pay TV, and NTL’s advertising income was low.

‘We could do great things,’ Branson agreed. There was, he convinced himself, no downside.

Negotiating the deal was excruciating. Both sides haggled over their own value. Eventually, it was agreed that Branson would receive £120 million in cash and 10.7 per cent of the new Virgin Media company, worth about £962.4 million ($1.67 billion). Virgin would receive 0.25 per cent of revenue for licensing the brand – £9 million in 2005. Virgin’s accounts that year would show an ‘exceptional item’: a profit of £746.7 million from the sale of 184 million shares in Virgin Mobile. Branson had earned over £1 billion from the British mobile company, and he hoped to earn millions more elsewhere. Tom Alexander’s reward had increased slightly.

Shortly after the deal was finalised, Branson heard bad news. Disillusioned by his American employers, Simon Duffy had resigned and had been replaced by Steve Burch, who failed to live up to expectations. ‘Where’s Steve?’ was frequently asked
at NTL’s headquarters in London about an executive unable to stem 10,000 customers cancelling their subscriptions every month. Resolving Burch’s fate and the increasing debts required negotiation, but in the meantime Branson hoped to capitalise on his elevation to media grandee.

In 2006, Branson had described anyone taking on Rupert Murdoch as ‘mad’, but that was his plan. ‘I love a challenge,’ he volunteered. No Briton had ever beaten Murdoch outright. ‘BSkyB is dominant,’ admitted Branson. ‘It really is a good company but being dominant is not necessarily good for anyone.’ He was gearing up to repeat his familiar dare against a Goliath. He equated the media mogul to Lord King and cast himself as the people’s champion. ‘BSkyB’, he announced, ‘is as dominant as British Airways was twenty-one years ago. It is perfect territory for Virgin to move into.’ The prize was beyond calculation. ‘BSkyB does not like competition,’ Branson reassured himself. Without football, BSkyB’s profitability was limited, and the recent award of some Premier League games to Setanta Sports, an Irish group, appeared to expose Murdoch’s vulnerability. Virgin Media’s offer of telephones and broadband would, Branson believed, ‘scare’ BSkyB’s executives.

There was a familiarity to Branson’s tactics. In every new business he entered, he played the victim of an ‘uncompetitive’ monopoly. In the public interest, Branson reasoned, the incumbents ought to step aside to facilitate Virgin’s success. Although indebted and stumbling, he forecast that Virgin Media would transform cable TV in a similar manner to his performance in aviation, trains and mobile telephones. A £20 million advertising campaign, he believed, would ‘hit BSkyB’s soft underbelly’ in movies and sport and offer ‘better value’. His fellow executives joined his chorus. ‘We think that’s a weakness we can exploit,’ they chimed.

To challenge BSkyB, Branson wanted to buy ITV. If successful,
Virgin Media would not only have a better TV channel than Sky and an outstanding library of old programmes, but could also bid for Premier League football. Although Virgin Media’s debt would soar, the interest payments could be covered by ITV’s cash flow. There would undoubtedly be a fight, but that was precisely what Branson loved. The prize was Virgin’s elevation to media giant and Branson’s eventual exit with more money.

The beginning was not encouraging. Branson’s call to Sir Peter Burt, ITV’s golf-loving chairman, on 8 November 2006 to outline the £4.7 billion ($8.9 billion) offer ended frostily. Although ITV’s audiences and profits were declining, Burt was unconvinced by Branson, who in turn was unwilling to back off. Speaking from Necker, he described Burt’s reaction to the call as ‘very, very warm’. Divorced from the sentiment in London, Branson was unaware of the unease aroused by his bid to control ITV, which was strikingly similar to his offer in 1999 to run the ‘People’s Lottery’ for no profit. In that campaign, many had assumed that Branson’s ‘charity’ was a neat way to endlessly promote himself on TV by offering £1 million prizes to ‘Virgin Winners’. His potential ownership of ITV raised similar suspicions.

Branson failed to anticipate the Murdoch family’s reaction. James Murdoch, the scion’s son, was twenty-one years younger than Branson and keen to establish his own credibility. Nurtured on his father’s invasions of competitors’ territory, Murdoch retaliated by making a pre-emptive bid for ITV. Just before 6 p.m. on Friday 17 November, Murdoch’s bankers announced that his company had paid £940 million for 17.9 per cent of ITV’s shares. At 135 pence, Murdoch had paid 20 pence over ITV’s closing price and 13 pence more than Branson’s offer. Sky’s domination was consolidated. Destabilised by the coup, Branson was shocked.

‘The Murdoch empire is a threat to democracy,’ he raged. The government and the regulators, his publicists repeated, should
stop ‘Murdoch’s cynical and reckless’ move and his ‘blatant attempt to distort competition’. Branson’s mood was not helped by ITV’s formal rejection on 21 November of Virgin’s offer. He had lost the battle but he would not surrender without harming Murdoch. Branson knew all about protecting and challenging monopolies by securing government support.

James Murdoch announced that BSkyB would not seek a seat on ITV’s board or use its stake to exercise ‘a material influence’ on the broadcaster. Clearly, Murdoch calculated that Labour ministers, keen to retain the support of News International, would not interfere. He was less concerned by Branson’s sentiments. ‘Sir Richard’, quipped Murdoch, ‘seems to believe that he and his partners in NTL-Telewest have a unique right to acquire ITV.’ British broadcasting, he said, was the ‘cosy’ victim of the ‘dead hand of history’ protecting the BBC.

‘All of us know that governments are scared stiff of Murdoch,’ Branson retorted. ‘If the
Sun,
the
Sunday
Times,
The
Times,
BSkyB, the
News
of
the
World,
just to name a few of the things Murdoch owns, come out in favour of a particular political party, the election is likely to be won by that particular party … If you tag on ITV to that as well, basically we’ve got rid of democracy in this country and we might as well just let Murdoch decide who is going to be our prime minister.’ He urged the government to intervene. ‘There comes a time when governments have got to draw a line in the sand. Every single time the Murdoch empire makes a move on more and more of the British media, governments don’t have the courage to stand up to them.’ The solution, he insisted, was for the regulator to investigate BSkyB and order the sale of the shares. ‘A businessman’s job’, Branson admitted, ‘is to try and dominate, but the government’s job is to make sure monopolies do not come about and if they do, break them up.’ There was truth in Branson’s outburst. Rupert Murdoch did enjoy considerable influence. In a recent interview, he had
moaned that whenever he visited London, both Gordon Brown and Tony Blair issued competing invitations for breakfast. In private, Branson urged ministers to order an inquiry. Murdoch’s power, he continued, was waning. Circulation of his tabloids was falling and the authority of the internet rising.

By casting himself as the victim, Branson encouraged Murdoch to retaliate. BSkyB demanded more money from Virgin for showing BSkyB’s programmes and simultaneously decreased the price BSkyB would pay for the Virgin programmes shown on its channels. The threat was unequivocal. If Virgin refused to pay more, their 3.3 million subscribers would lose BSkyB’s most popular shows. ‘We have the choice of being hung in the afternoon or shot at dawn,’ Branson was told by his executives. ‘All we want is a level playing field.’ Murdoch, Branson complained, wanted to strangle a weak competitor.

In the rising temperature, on 6 February 2007 Virgin Media was floated on the Nasdaq in New York at $27.90 per share. ‘They’ll soon be at $30,’ predicted Jim Mooney, embarrassed by the low price. Just as Branson arrived in Toronto to promote Virgin Mobile, Virgin Media’s shares began tumbling towards $25. His publicity stunt of escaping from an exploding cage suspended above a downtown square secured trifling coverage in the media. Virgin Mobile in Canada would attract fewer than 100,000 active customers among the 18.5 million mobile-phone subscribers, and the service was soon close to collapse. Challenging Goliaths, Branson discovered, was no longer fun.

During February 2007, the fifty-six-year-old in Necker found himself on unfamiliar terrain. He faced an adversary who was richer, faster, younger and more cold-blooded than himself. James Murdoch had no intention of surrendering BSkyB’s dominance. Just as Branson vigorously protected Virgin Atlantic’s rights at Heathrow, Murdoch planned a publicity campaign to destabilise Branson. First, the controller of one-third of Britain’s
newspapers published advertisements encouraging Virgin’s customers to switch to BSkyB. ‘Virgin Media customers deserve better,’ squealed one BSkyB advertisement. ‘If you’re a Virgin Media customer, no one could blame you for feeling disappointed or let down,’ preached another in a negative advertising campaign that was painfully similar to Virgin Atlantic’s against British Airways. Virgin could only minimise the bad news by offering unprofitable contracts to subscribers and using Branson’s self-promotion to conceal the slide. About 25,000 customers switched during the first month. While in the past Branson had aggressively attacked his opponents in the media – reflected by the regulator’s censure of Virgin for issuing misleading advertisements against Orange – he had never been the target of his own tactics. Virgin retaliated with equally scathing advertisements. In response, BSkyB offered customers new services, including high-definition BSkyB Plus and more channels. Virgin Media could not reply in kind. Gradually, Branson realised that Mooney’s original pitch of ‘quick in and out’ was ‘back-of-the-envelope bullshit’. In a raw contest for survival, Branson was ill equipped to land a knockout blow. He decided to surrender.