Business Stripped Bare Page 13

  Success one day does not give you a free lunch every day thereafter. Obviously, you can't plan for the unexpected. All you can really do is never let your guard down. Delivery is not just hard work: it's endless.

  We had invested more than £2 billion replacing all the trains on our CrossCountry routes with Voyager diesel trains. The trains were popular and extremely reliable. There was a 50 per cent increase in passenger numbers – and suddenly people were finding it difficult to get a seat on the busier routes. We were a victim of our own success!

  Altogether more troubling was the thought that our passengers were victims. I received one letter in particular from a couple travelling from Preston to London. They had been planning a treat in London and didn't realise that they now had to book a seat. When they arrived, they found the staff unhelpful. Given the husband was disabled and used a wheelchair, this was pretty terrible of us. I personally sorted this one out, and encouraged my Virgin Rail team to improve. I was concerned that we might have taken our eye off the ball when it came to customer service. I penned a letter to Ashley Stockwell, the brand and customer service guardian for Virgin Group.

  Dear Ashley,

  I am worried about Virgin Trains and the service we are delivering to the customer. We have a board of directors who have understandably got tied down in franchise negotiations and the bigger picture issues. When we first got involved we put people in from Virgin Atlantic who really cared about staff and customers. Somehow, things seem to have slipped. Tony Collins realises this – he told me very frankly yesterday that we had 'lost that customer service'. I'm sure he'll do everything he can to address the problem. Any help your department can give I'm sure would be welcome.

  We got better. Increasingly, we picked up plaudits. By April 2006, when we announced our decision to reapply for the CrossCountry franchise, I was beginning to believe we had achieved something extra special in Britain. Paraphrasing slightly, I used the old Magnus Magnusson line from Mastermind to allow us to continue: 'We've started, so we'll finish.'

  But there was opposition to our franchise inside the Department of Transport. Before a crucial meeting with officials, I got a phone call from a well-informed transport journalist. He knew the exact time of the meeting and what was going to happen and who would be attending. He was right in every respect. He also told me that the government's endgame was to destroy Virgin's CrossCountry franchise and they were looking for an excuse to stop it. I wrote in my notebook: 'If this guy is right on everything else, is he right on this?'

  We argued that we'd worked hard and that punctuality was the best since we took over, revenues were up 40 per cent and passenger numbers up 50 per cent – and the government were now getting 87p in every £1 of extra revenue.

  In my notebook I wrote: 'We've been told that certain elements of the Department of Transport want CrossCountry back so it can be remapped and absorbed by other networks. I hope that's untrue. I'm confident that the Virgin Group's bid will not be bettered by another operator in a competitive tender. I find this all a little bizarre to say the least. But that's the rail business.'

  It certainly was. Having done all the donkey work, taken all the flak and increased passenger numbers by 50 per cent in ten years – Virgin Trains lost the CrossCountry franchise. But that's life in twenty-first century Britain. There are (he says, through gritted teeth) no regrets. And even if there were, in business, as in life, you're better off just moving on. After all, we still had the West Coast Main Line.

  Virgin Trains is criticised in some quarters for the supposedly easy money we've racked up in the form of government subsidy. I think those people should consider the time and effort we spent for very little financial return. Out of that subsidy money we had to pay Network Rail for running on their tracks, and as their problems increased, so did our access charges. When we signed off the first deal we never envisaged the increases. So, between 1996 and 2006, we did indeed receive £2 billion in subsidy – and promptly waved it goodbye again, paying £2.4 billion in track access charges, first to Railtrack, then to Network Rail; in other words, back to the UK government. Plus Virgin Trains paid higher charges to Network Rail than any other train operators – this when the subsidy was reduced by half from £526 million to £268 million at the end of March 2006!

  Not long ago we put together a proposal to increase the size of each train from nine to eleven carriages so that the business could continue to meet the soaring demand. I explained to Douglas Alexander, then the Secretary of State for Transport, that while we could deliver on our franchise agreement, from February 2012 our passenger numbers would be pushing our current seating capacity to its limit. Our proposal was to increase delivery to ten and eleven cars at optimum time from around 2010. The total investment required would be around £260 million, all to be funded by the private sector. We also proposed additional car parking and smart-card ticketing and in return we would like an extension of our franchise for a couple of years, please. I felt that our track record – excuse the pun – was enough to give us some chance of the government accepting this. But later in the year they rejected our bid to increase the number of cars. At the time of writing this book we are back in discussions over extending the trains again. I hope sense will prevail. But come 2010, if you ever find yourself standing all the way to Birmingham, remember who to thank. It drives me to distraction to think that the increasing popularity of our trains is being threatened by the government's mean-fistedness and lack of vision.

  At the same time we are hampered by the poor state of the line which has been undergoing a massive upgrade in the last four years. Our wonderful team – led so ably by Chris Green for many years and now by Tony Collins – has remained focused on delivering a great service in the face of these incredible hurdles. Despite these issues I'm proud to say that Virgin Trains has delivered on its promises – and it hasn't been easy. First and foremost, we knew from the start what it was we wanted to deliver, and we stuck to our guns in the teeth of official discouragement and a negative press. We wanted the best-looking, most comfortable trains because we knew anything less wouldn't wash with a public that had had to put up with a declining service for far too long. Our trains had to be efficient – as green as possible – because we had no idea what would happen to the price of energy, and there was no hint or sign that energy costs were going to come down in the long term. (How right we were!) Finally, we wanted the safest trains possible, because in the travel business, this is the bottom line: people are putting their lives in your hands. Nothing short of an act of God should ever put your customers at risk.

  Our proposition, then, was fully considered in the light of our core business values, our medium-term strategic considerations and our long-term feelings about where our industry was headed. However overblown this sounds, this is what you should be doing all the time as you consider how to deliver on your business proposition. Never imagine that you are immune from big events. Make your small decisions in the light of the bigger picture, and you are at least pointing your craft in the right direction to ride out any storm.

  Remember, also, that the world is full of people who want to put you right, who want to play the realist to your wide-eyed innocent. Governments are notorious for this sort of thing. Ministers are like mayflies. No sooner do they get to grips with what they're supposed to be doing than they're gone. Keystone of our liberties it may be – in business terms, it's a disaster. In the UK in particular people who have no real tenure over the issues they're handling let long-term considerations fly out the window. It's not that they don't understand them, or even agree with them; it's that they despair of ever getting them past the Treasury quickly enough.

  You can spot negative people and stultifying institutions a mile off. Have the courage of your convictions, and ignore them. Instead, gather together people you can trust – get them to play devil's advocate; get them to point out the problems you may inadvertently be steering towards.

  If you're lucky enough to become
an agent of change, it's incredibly frustrating when other people fail to grasp your ideas – even worse when they reject them out of hand. But you can see why it happens. Change can be dangerous. Often, the bigger you are, the slower you move, the more dangerous change becomes. Of course governments are afraid of change: they know they'll never be able to get out the way of it quickly enough. Neither can many big companies.

  It's no good saying 'Prepare for change' or 'Embrace change' or whatever other cliché the business books are peddling this season. The bald fact is, change, most of the time, is a threat. It's the thing that wants to kill you. And let's face it: one day it will.

  In business, change always happens more quickly than you want – it steals up on you fast, when you are least prepared. This was certainly true for Virgin Records in the music industry.

  For the multinational consumer electronic giants, survival depends on finding the next disruptive technology and getting it into the marketplace. Being the first to do so is admirable. But being the best is what really counts. I've always followed my nose; it's never occurred to me to wait for others to make mistakes, just so I can learn from them. I can't see the fun in it. Beyond that, though, I can't really criticise: the ones in the vanguard are generally the ones who get shot.

  During the 1980s and 90s, as the Philipses, Sonys, Panasonics and Hitachis of this world headed down blind alleys with products that failed to bite, the music industry was moving logically and unstoppably towards digital, downloadable music – a process that reached its apogee (at least, from the point of view of where I'm sitting now) in Apple's iPod.

  The digital music revolution was heralded by the arrival of the compact disc. The progression from analogue to digital recording was a revolution for the eardrums. In the mid-1970s, the seven-inch single was the gold standard for the pop music industry. All the pop bands (though not all the progressive rockers) wanted a number-one hit in Britain, America and then the rest of the world. To have a number-one hit was to arrive as a band or solo performer.

  By the early 1980s our domination of the charts had helped Virgin Records become the world's top independent music company. There was tremendous excitement about seeing a new record breaking into the charts, and the band's virtually compulsory appearance on the BBC's Top of the Pops the following Thursday. All this hoopla had a positive effect on the band's album sales; the two went hand in glove.

  It's easy to get nostalgic about old formats, but there's no historical justification for it. Since the nineteenth century, most recording technology has turned over on a thirty-year cycle. Thirty years after the wax cylinder carried music to wow the opinion shapers of the 1880s, brittle, shellac 78rpm recording discs revolutionised the listening habits of the masses. After the Second World War, the vinyl LP, the single and the EP (the extended play, containing two or three tracks on each side) made music listening considerably less fraught. Why, you could even send these sturdy, flexible discs through the post!

  Those pundits talking now about how digital downloading is killing the major companies should remember that the last time the industry was in meltdown was – surprise, surprise – just less than thirty years ago, in 1982. The economic recession was having a deep impact. At the time, Virgin Retail had over a hundred record stores, in every town across the country – and during weekdays they were deserted.

  More people were home-taping off the radio, too, or from a friend who had bought the original LP – a forerunner to the illegal downloading that led to Napster and all the other sites which offered the punters music for free.

  The digital revolution had arrived in the recording studio some time before, and computer software was already employed to mix albums and soundtracks. Now, though, digital music was about to take the public by storm.

  Dire Straits were the format's first big seller. Vinyl fought a valiant rearguard action, and the aficionados said they still preferred the analogue sound. Many a music snob with a Quad system turned his nose up at Dire Straits on a plastic beer mat. Many, many more went ahead and bought it. Philips, the Dutch electronics giant, predicted at the major Paris music fair that the compact disc would become 'the new world audio standard'.

  There was fierce debate in our office between the hi-fi buffs. Could vinyl ever be surpassed by a shallow digital sound system? At the time there was genuine doubt – even today I hear people say that vinyl is much better. An LP's record cover and the sleeve notes, meanwhile, had become a contemporary art form.

  But the shiny CD was on the march. It was more convenient, it was easier to use and it protected the furniture from your beer glass.

  Philips, who had developed the system, announced plans for software to be manufactured and released by PolyGram and sold through record retail outlets, separately from the hardware. The CD also had a competitor in the LaserVision disc which was ready for the spring of 1983. JVC, the Japanese electronics giant, was promoting its VHD system. There were about thirty companies looking at manufacturing special CD players, and I was very keen not to be left behind if this was going to be the new standard.

  Only PolyGram and Ariola had made agreements with Philips for the release of products for the new CD system. (At that time, I thought the royalties being demanded by Philips were too high.) Philips began delivering the first CD players in Belgium. They could be attached to a hi-fi system, as a separate, just like the record deck, and were expected to sell for around £300–£400. This was a lot of money for the young record-buying public – and in the early days the CD owner was usually the richest guy in the street.

  From launch, around 200 titles would be available, retailing at between £7.50 and £8.50. PolyGram were preparing a disc-pressing plant in Hanover in West Germany, which could produce 500,000 in 1982, and a staggering four million the following year. In June 1982, Sony ran some full-colour adverts in the music press. They showed a full-size twelve-inch LP, alongside a compact disc, depicted in actual size. The advertising campaign was slick and it impressed me: 'Six months from now the industry will expand dramatically.'

  The CD was the answer to many a music lover's prayer: no wow, no flutter, no wear, virtually immeasurable distortion, wide dynamic range and no surface noise.

  My notebooks are full of the questions I had about the impact on our business and what we should be doing to counter any threats. I wrote: 'What happens to the record collection around the country – do people replace their vinyl with CDs?'

  The arrival of the compact disc was a shot in the arm for our industry but, as with most medicines, in the wrong dose it could quite easily kill the patient. The CD was a game-changing technology – and we had to adapt or die. The arrival of the CD and, later, the DVD would eventually give retail a lease of life, but at first the only way for our business to survive the CD menace was to cut the cost of vinyl. And that's what we did. We needed to start shifting stock and clear the decks for the new. The era of selling vinyl LPs by the truckload was coming to an end.

  Meanwhile, in March 1982, Virgin Records shuffled the pricing structure for dealers. Price changes were being forced on all of the industry by high inflation rates in the early years of Mrs Thatcher's government in Britain. We had to put up the price of our chart-topping bands, so Dare by Human League was selling for £3.40. We made an 18p increase to £2.92 from £2.74 to dealers for our back catalogue albums. But we reduced a certain number of titles to £1.82 on a purely experimental basis, to see if this could shift material that had been overlooked, such as the Skids and Magazine.

  Some of the smaller independent retailers protested. Alan Davison, the vice chairman of RAVRO, the association of record dealers, who ran a small record shop, joked at the time in Music Week: 'Trying to think of everything that would be nice for this year, I found the really big thing I would like to see would be for Our Price and Virgin to close down. They can open up again, if they want to, provided they sell records for the right price. Records are a specialist product. Discounting them, like groceries, was the worst thing th
at ever happened.'

  Poor Alan: the only way you can get away with charging high prices in a deflating market is to downsize and specialise. That means you're firefighting and innovating at the same time – a difficult double somersault, and one Alan simply didn't have the will for. He simply put his prices up to the full recommended retail price in order to ensure his business mark-up of 33 per cent. This made no business sense to me. The margin on records and tapes was dropping from 32 per cent in 1978, down to 23 per cent in 1981, and cut-throat discounting had it as tight as 16 per cent. According to the BPI, the notional price of an average LP was £5.22 in 1981 – while the actual price paid by the record buyer was £4.39. Margins were so tight that a record company without hit artists that season was unlikely to weather the storm.