Branson: Behind the Mask (29 page)

‘We want to carry on, but there’s no more money from Virgin,’ said Donaldson in the second month of the magazine’s existence. In its own bid for survival, Virgin was not only refusing to invest more money but was issuing invoices to
The
Project
for its management costs. Sean King was surprised that Virgin’s financial support was less than expected. ‘It’s been sweat, blood and tears,’ he told Noguera, ‘and we’ve got to get out.’ Seven was proud of its product but could not afford to spend more money.

Donaldson found a buyer for Seven’s shares. Over a cup of coffee in Kingsway in April 2011, he introduced himself to Francis Malone, an aspiring publisher from Waterford in Ireland who would describe himself as ‘one man and a dog’. With his brother Martin, Malone was the owner of Other Edition, a registered company selling
Interview
,
an American magazine app which was also available on Apple’s iPads.

‘
The
Project
is fantastic,’ Donaldson told Malone. ‘Apple are using it as a showcase. But we now need a new partner.’ Donaldson proposed that the Malones buy Seven’s shares. ‘You can use the Virgin name to sell both apps,’ he said, ‘and with Virgin’s help you’ll be getting free publicity.’

Francis Malone had no money and little experience but, as he told his brother, ‘It’s not every day that Virgin calls me up and says, “We think you can help us.”’ Martin, a City trader, agreed to fund his brother’s venture. The buy-in price, Donaldson said, was £500,000, plus 11 per cent of the gross revenue as a royalty for using the Virgin brand – plus a further £500,000 to cover Virgin’s historic investment. To prove their interest, Martin Malone paid Virgin an unrecoverable deposit of £54,000.

‘Have you checked out the Malones?’ Donaldson was asked by Seven’s executives and journalists.

‘Yes,’ he replied reassuringly. ‘We’ve done the due diligence. They are OK.’

With Donaldson’s encouragement, Seven transferred its shares to Virgin Digital Publishing, and Virgin’s lawyers issued a 142-page agreement to the Malones. The brothers imagined the legal process would take two weeks and the fees would be £20,000. Instead, two months later their lawyers would charge over £100,000 and then complain that they were not paid. After the contracts were signed, Virgin and the Malones became partners in that company and in Virgin Interactive Publishing.

Convinced by Donaldson’s assurances, Seven lent the Malones their Apple Macintosh computers worth about £50,000, and Noguera and his small team of journalists moved into the Malones’ rented office in Park Lane. Charlie Parker refused to follow. ‘I don’t trust Francis Malone as far as I can throw him,’ he said. ‘And all Virgin wants is more money, more money, but they’ve got no interest in people.’

Unknown to the journalists and Seven, the relationship between
Virgin and the Malones had already fractured. Without Parker, the Malones could not sell advertising and thereafter pay Virgin.

‘You sold us a pig,’ Martin Malone told Donaldson. ‘Virgin Digital Publishing is just a shell company. It hasn’t got a single employee.’

‘Francis knew what he was buying,’ replied Donaldson.

‘All you want is money,’ Francis Malone spluttered. ‘We’re a backyard company without any money.’ Malone felt sorry for himself and posed as the innocent wide-eyed country boy. ‘We’re poor Irish people,’ he said. ‘I believed Virgin would boost our credibility. Instead, everything was on their terms. They thought we should feel grateful. I got caught up in it.’

The journalists were unaware of the rupture. Their last salaries had been paid two months earlier but, trusting Donaldson’s assurances – reinforced by the Malones’ promises – they continued to produce the magazine. New editions were published as an Apple app, subscriptions were sold and revenue from advertising originally sold by Parker was banked, including $100,000 from BMW. Although Basil Hassan drew his salary and Virgin was paid its fees, the editorial team went unpaid. Over the following weeks, Francis Malone was repeatedly asked by the journalists for their salaries. ‘The money’s on the way,’ he would reply. Trusting the Malones and Virgin, Noguera mortgaged his home to pay his staff. Neither Donaldson nor the Malones objected. His fears were placated by an assumption that ‘Virgin will look after us.’ After all, Hassan, an accountant, had been placed in the office by the company. ‘I saw money was coming in,’ Hassan said later, ‘and Virgin did receive money from the Malones.’ But he failed to persuade Virgin or the Malones to pay the journalists.

On the internet, complaints began appearing about the magazine. ‘A complete rip-off,’ wrote one subscriber. ‘Not worth it,’ agreed another after receiving only two issues for one year’s
subscription. ‘You guys suck,’ wrote a disgruntled blogger. ‘How do we get our subscription money back?’

By November 2011, the editorial team was owed about £200,000. Donaldson insisted that under their agreement, the Malones were obliged to pay. The brothers made more excuses.

‘You got us into this,’ one of the writers told Donaldson.

‘How do you think I feel?’ Donaldson replied. ‘I could lose my job over this.’

‘Virgin don’t give a shit about us,’ shouted the writer. ‘All you’re interested is your own job and Virgin’s reputation.’

‘I just can’t get into McCallum’s head space,’ retorted Donaldson. ‘He’s buying a bank for £700 million and this doesn’t really matter.’

The journalist became particularly incensed by the simultaneous publication in the media of photographs showing Branson with his arms around a young businessman. ‘What a bastard,’ said one editor. ‘Branson posing as the champion of young entrepreneurs.’

Re-reading Branson’s philosophy about the new age of capitalism was revealing. ‘The Age of People’, he wrote, ‘is all about shifting the focus to how businesses can and must deliver benefits to people and the planet – as well as shareholders.’ Branson, the journalist thought, was playing with the emotions and ambitions of his awestruck believers. The journalist became doubly angry after reading a news post by Virgin’s publicists stating that
The
Project
had been nominated as Apple’s ‘App of the Year’. In the midst of its self-congratulation, Virgin ignored the unpaid editorial team. The reporter’s anger was aggravated by Donaldson’s lack of remorse. ‘You said the Malones were reliable,’ said the writer, who recalled one passage in particular from Branson’s
Screw
Business
:
‘It is becoming more and more clear that there is no incompatibility between doing business in an ethical and transparent manner and achieving good financial
results. This is the “false dilemma” which needs to be eliminated from business talk.’

Donaldson headed for the black-tie party at a hotel in Victoria, where the Malone brothers had booked a table to celebrate the nomination of
The
Project
as ‘App of the Year’. At the climax of an argument, he was ordered by the Malones to ‘piss off’. He obeyed. Shortly after,
The
Project
team walked out of their offices. They agreed to return only after they were paid. On their computers was sufficient material for three more issues.

The Malones relocated to London’s East End to continue publishing the magazine but did not pay the journalists or Seven for the computers. When they failed to pay the rent, the landlord seized the Apple Macs. The crisis alarmed Donaldson’s superiors. Virgin’s reputation was threatened by Sean King’s decision to take legal action in a bid to recover Seven’s money. ‘Like Anthony [Noguera],’ King emailed Donaldson on 27 November, ‘we had concerns with the Malones but were given comfort by Virgin’s involvement. These guys have a plan and it seems like that it involves not paying us.’

In February 2012, Seven petitioned the High Court to recover its money. At a hearing in March, the Malones did not appear in court. On King’s second petition, Virgin Digital Publishing was struck off the register at Companies House. Just before the next hearing on 23 July to wind up Virgin Interactive Publishing, Virgin changed the name to Project Interactive Publishing to avoid further damage to the Virgin brand. King’s legal victories were pyrrhic. The Malones had no money, and Virgin was legally protected from any complaint.

‘We’ve done the best we can,’ said Branson.

‘He knows he fails at some things, but at least he tries,’ said his publicist.

The casualties at Seven and
The
Project
won no plaudits and lost money. One journalist and his wife lost their life’s savings,
while others were unemployed for many months. But like most of Branson’s injured partners and employees over the previous forty years, they remained silent. No one, they knew, had ever benefited by publicly complaining about Branson.

There was a piquancy in the sad saga. Several of those who had lost money had read one of Branson’s homilies: ‘Too many business leaders’, he wrote in his book, ‘are too quick to jump down people’s throats, or rule by fear, which is foolish. You should lead by praise – you can’t launch an idea if no one likes you.’

Virgin’s values could be so confusing.

‘Traders appear to think Virgin Media shares will sink,’ reported the
Wall
Street
Journal
in September 2010. The gloomy speculation reflected the network’s pre-tax losses, which had risen in the first half of the year from £186 million to £249 million. Buffeted by the recession, many customers were not renewing their contracts for a package of broadband, TV and telephone. Even Virgin Mobile was losing money because rates were subsidised to maintain a respectable number of subscribers.

Although Branson owned only 3 per cent of Virgin Media, his profile as a global player was enhanced by the public’s perception of him having a considerably bigger shareholding. But like all his businesses, his options were declining. After a decade, Virgin Media had run its course. Branson had earned over £1 billion by backing a brilliant proposal, but the business was too short of money and too small to flourish independently. Ever since Virgin’s defeat in the content war and his failed attempt to buy ITV, Virgin Media had been too feeble to rival Sky. The solution adopted by Neil Berkett, the company’s chief executive, copied Branson’s tried and tested strategy. Whenever his businesses were threatened, first, he sought protection from the government’s regulators; next, he abused his competitors; finally, when all else failed, he looked for an exit.

Virgin Media needed TV programmes, especially sport. Sky’s high charges for transmitting the Premier League and other events aggravated Virgin’s losses, so in 2010 Virgin asked the OFT to order Sky to cut the price for showing the crown jewels of its
output. Despite Sky’s resistance to an uncommercial proposal, the OFT ordered the company to reduce its charges to Virgin by 23 per cent. The victory allowed Virgin to announce bargain prices. Sky’s Premier League matches could be seen on Virgin for £15 per month, compared to Sky’s price of £36 per month. Similarly, the rate charged by Virgin to watch Sky’s cricket matches was slashed by a third. Sky appealed and won on the grounds that the OFT had ‘misinterpreted’ the evidence. ‘This is simply not credible,’ protested Virgin, once again outclassed by Rupert Murdoch. Berkett was resigned to the uneasy duopoly: Virgin had 4.2 million customers against Sky’s 10.6 million.

In 2012, his company’s fate was shaken. In a bidding war, BT bought the rights to thirty-eight live Premier League games and four seasons of rugby for £890 million. Overnight, Virgin was squeezed. Sky was available to every British home through its dishes, and BT’s telephone network was universal, but Virgin’s cable network was limited. Digging up roads to lay more cables risked bankruptcy. Faced with aggressive competitors, Virgin’s share of the broadband market looked certain to decline unless it could repair a credibility gap.

The company’s strength was the brand. For those who disliked BT and Sky, Virgin was an attractive alternative. With about a fifth of the market, Virgin could survive, but servicing the company’s debt, now reduced to £5.7 billion, excluded any chance of serious profits for some time.

Speed was Virgin’s virtue. Virgin promised faster broadband than Sky, and greater capacity and speed than BT’s copper telephone wires or its replacement fibre optics. ‘We will always be a leader in this space,’ said Berkett, ‘not by a neck but by a furlong.’ In the near future, he said, Virgin would offer 100 MB broadband services, compared to BT’s usual limit of 5 MB. Success depended on persuading the public of Virgin’s superiority. Despite his reservations that Branson was ‘overexposed
within the Virgin group’, Berkett recruited the master to present the advertising campaign ‘Stop the Con’. The script was pure Bransonian: Virgin’s rivals were accused of orchestrating ‘the broadband con’ by advertising exaggerated broadband speeds of up to 24 MB but delivering at best only 6.5 MB. Virgin, from Branson’s mouth, was portrayed as saintly.

His presentation lacked resonance. In 2011, Ofcom reported that 22 per cent of Virgin Media’s customers were dissatisfied and that Virgin trailed Sky and other rivals in all services, including broadband. One year later, the Advertising Standards Authority (ASA) criticised Virgin’s claim to provide ‘the UK’s fastest broadband’. Comparisons by independent surveys showed that Virgin’s ‘Stop the Con’ advertisements were misleading, and they were banned by the ASA. Weeks later, the ASA again criticised Virgin Media’s targeting of households in particular streets to buy ‘instant’ connections. The streets, the ASA reported, were not linked to Virgin Media’s network. Next, Virgin was criticised for misleading new subscribers by failing to mention the compulsory cost for a landline. The ASA also banned an advertisement to promote Virgin’s Tivo recorder which featured David Tennant posing as Dr Who. ‘Say bye-bye to buffering and hello to a superfast broadband,’ was Virgin’s slogan, which was judged by the ASA to be a misleading exaggeration. The BBC’s complaint against Virgin’s suggestion that the corporation endorsed Tivo was upheld, as was the accusation that Virgin had infringed the BBC’s intellectual-property rights.

To escape the opprobrium, Berkett approved a new £53 million advertising campaign during the London Olympics. This was to feature Usain Bolt, the world’s fastest runner. Fitted with a beard to impersonate Branson, the Olympic gold medallist promised TV viewers that ‘Richard Branson is doubling your broadband speed.’ In the next shot, Branson appeared alongside Bolt to confirm that all Virgin’s speeds would double. Branson
was congratulated for showing how Virgin ‘likes to do things differently and with personality’, whereas BT looked ‘dull and corporate’. Rivals complained that Virgin’s claim to double all speeds was misleading. Virgin replied that the advertisement was ‘light-hearted’ and the company was ‘not making an absolute claim’, but the ASA ordered that Virgin’s advertisement be withdrawn. The succession of misleading advertisements created an unexpected impression of the company, much like the time when Virgin sued the owner of the Virgin Café, an unremarkable bar in the Australian outback, for infringing Branson’s copyright.

BT lodged a more serious complaint. The corporation had paid a high fee to feature as the Olympics’ official broadband provider, and BT accused Virgin of infringing those expensive endorsement rights. No one at Virgin’s headquarters apologised. Bolt’s campaign had attracted extra customers and, although the immediate additional profits were wiped out by the advertisements’ costs, the company’s image had been enhanced. Branson delighted in using what he called ‘humour’ to ridicule competitors, although he took great offence at any criticism of him or Virgin. BT’s complaint was easily forgotten. The strategy had made a profitable exit easier.

In the aftermath of the Olympics, Neil Berkett no longer had the stomach to fight Sky. There had been constant conflict and repeated defeat. The company’s fate was best sealed by a sale. For some years, Berkett had discussed Virgin’s future with the managers of Liberty Global, the world’s biggest cable company, founded and controlled by John Malone. Among Malone’s trophies was beating Rupert Murdoch. He had accumulated 18 per cent of News Corp.’s shares before, to Murdoch’s relief, agreeing to swap them in exchange for Murdoch’s stake in DirecTV, America’s biggest satellite TV business. Buying Virgin made sense for Malone: it would increase Liberty’s total debt to $39 billion, and he favoured debt-burdened operators to minimise his own
tax bill. Virgin also completed the jigsaw. Malone owned eleven cable networks across Europe, and buying Virgin Media could fulfil the goal that had eluded Branson: namely, challenging Sky’s dominance from strength.

Berkett had made Virgin Media attractive to Malone, with the successful Bolt campaign coinciding with the company’s first profits. Liberty’s offer of £14.7 billion ($23 billion) was judged by some to be excessive. But Berkett knew he had a good deal. Branson received £205 million ($316 million) for his remaining stake, and he could expect to earn about £8.5 million annually from the branding licence. ‘Branson’s lucked out in the games of life,’ commented an insider, noting that his ambition for more profits from Virgin Mobile was exhausted.

Posing as a sixties hippy, Branson had tried to relaunch the network in America by appealing to the Facebook generation and attacking his competitors, but Virgin’s minuscule marketing budget was swamped by the billions of dollars spent by the major companies. Next, he again pledged to spend $300 million over five years to launch his network across Latin America. Chile and Colombia would be first in 2012, followed by Brazil, Argentina, Mexico and Peru. ‘We focus on youth,’ said Peter Macnee, Virgin’s manager based in Miami. One year later, Virgin’s tepid campaign had barely registered. Branson made a new announcement: he would raise $100 million to launch Virgin Mobile across Latin America, the Middle East, South Africa and central Europe, and thereafter in Russia. He spoke about already having eighteen million subscribers in nine countries, and expected $3 billion in revenue by 2020. The only certainty was the termination of Virgin Mobile in Qatar after a licence row. His model of a virtual network based on renting spare capacity was broken. Servers were providing a poor service for Virgin, and Branson could no longer undercut the established networks’ prices. He had enjoyed a good run, but in the end Murdoch had come out on top.

That outcome was not unusual. Since his rout of Lord King, BA’s chairman, during the original battle to establish Virgin Atlantic, Branson had not defeated another tycoon through outright commercial competition. His race had reached a new climax. Virgin, he decided, would withdraw from launching new businesses. To execute that transition, he appointed Josh Bayliss, a New Zealand lawyer, as Virgin’s chief executive based in Geneva. Bayliss’s task was to ‘redefine the business as a family investment company growing the revenue stream from royalties’ for the brand. To some, he appeared to be signalling Branson’s retreat. Virgin was not aggressively searching for new business opportunities, and Branson had revised his plan for his daughter Holly to be his successor. His withdrawal was understandable. A sixty-three-year-old living in Necker was remote from the high-street buzz dictating global consumerism. One consequence of the brand’s retreat was Branson’s reduced wealth. Even if the Rich Lists’ guesses about Branson’s fortune, which over the previous decade were always about £3 billion, were accurate – and they were not – in real terms his fortunes had declined. Since his money-making hit its high point following the sales of Virgin Music and Virgin Mobile, he had coasted downwards. Despite the changes, however, his lifestyle would remain unaltered.

The survival of some of his businesses depended on government regulators. None were more important than the officials at the UK’s Department for Transport. The image of Virgin Trains racing across Britain had become invaluable for the brand, and Virgin’s franchise was at risk. New bids were invited in 2012 for the West Coast line, and Virgin’s chances for renewal were uncertain. Branson was re-energised by the unusual prospect of possible defeat.