Business Stripped Bare Page 7

  For this start-up business there was a basic flaw – we didn't have any credit. We didn't have any references either, which meant the record companies wouldn't supply us. So we took out adverts in the music press and I managed to get a deal whereby I could pay for them a month in arrears. We didn't have any records either, so we went along to Ray Larone's company in Notting Hill Gate. We'd buy them from him at a discount and then mail them out to our customers. That way, we had the cash in from the public before we bought the records and paid for the advertising. This is how we got the business up and running.

  When I hear of today's entrepreneurs launching new businesses by putting all their debt on their credit cards, I think that this pretty much parallels what we were doing with Virgin Records. I'm not going to sit here and say, 'Don't do it.' But if you do do it, you have my sympathy. Self-funding your first business is cripplingly difficult.

  Ray's tiny shop soon became one of the biggest record sellers in England. The record companies' lorries would turn up with piles of packages of records, and we would have a lorry outside the back of his shop and then take them off to our office, which was in the crypt under a church in Bayswater.

  From the first, our image and sales pitch were vital assets. (We had precious few others.) During the early days in South Wharf Road, we all contributed, but John Varnom was the one who made a difference. He was off-the-wall, utterly unreliable, and very creative. He wrote our adverts in a Victorian-gothic style of self-parody but also an early Virgin brand-message of the future: that quality could also mean value for money.

  'There must be something wrong with them.'

  'There isn't.'

  'They must be old, bent, cracked, wizened, split, warped, spoilt, scratched and generally too hideous to contemplate.'

  'They aren't.'

  'They can't be smooth, glistening, perfect, unblemished, miraculous, black and shiny like those you get in the shops.'

  'They are.'

  'But surely there must be some difference, some gap, abyss, divide, chasm, canyon or other unusual feature?'

  'There is.'

  'What is it then?'

  'They cost less.'

  We all rolled up our sleeves, stuffing brown packages with cut-price Virgin mail-order albums by Led Zeppelin, Pink Floyd, Jimi Hendrix and the Rolling Stones. We were all paid the same, £20 a week, and it all had a very hippy, communal feel. 'Five to fifteen bob off any album on any label' – that was our sales pitch. And we were now working flat out on the mail-order business to cope with demand. The record companies realised we were the mystery behind the huge success of Ray's little record shop – and so they extended credit to us directly.

  But we weren't making any money. Over the years I've met a lot of old customers who were in on a scam. Irate people would phone up or write a letter and say they had never received their rock album. We had no proof that it had gone out because in our office it was all so chaotic, and proper accounting methods were unheard of. So we would send out another album. Our profit margin was so tight that doing this regularly – and we did do it regularly – was wiping out any of the money we made. This was one of the biggest business lessons I learned. Turnover can be huge, but it is the profit margin that matters.

  Still, the Virgin Records brand was getting noticed. Typical sales were several thousand LPs each week. It all had potential. Then disaster struck, and here I learned another key fact about running a business: try to have a plan B.

  In October 1970, the postmen and women of Britain began a bitter dispute for more pay. The strike lasted forty-four long and desperate days for us – and our business dried up. We needed to diversify the brand. Fast.

  We took out adverts in the music press. A half-page on 6 February 1971 announced that we had now opened a small shop at 24 Oxford Street. I'd managed to secure a decent short-term deal on the rent of the first floor of a three-storey shop, next to a secretarial college, and upstairs from NU Sounds.

  To combat the downturn we needed to get people into our shop. We increased the advertising campaign with 'A step-by-step guide to Virgin Records' new joint in Oxford Street'. The puns continued – 'They are no dopes at Virgin Records. That's because all our customers are cool. They know a swell joint when they see one.' We offered more than records; we had coffee, cassette tapes, posters and headphones, all within thirty seconds of Tottenham Court Road tube station. Some reckon that our staff sold even more than this, but I don't think I can comment about what they did in their spare time.

  By the end of 1971, we were buying full back-page adverts declaring we were: The Firstest, Bestest, Cheapest. Another advert began: 'Ha, ha, ha, ha. This is our managing director giving a customer money. Chap tried to pay full price for a record.'

  In some ways not a lot has changed. In 2008, if you're sitting on a crowded tube train on the Central line in London, you can look up and read our advertising for Virgin Media and it still carries the same tone of gentle irreverence. Even in the early days we were promoting convenience and customer choice – only in a different dimension.

  Back in 1971, someone had a bright idea. We should open a recording studio, too. Tom Newman, one of the original crew at Virgin Records, originally suggested we set up a four-track recording studio in the crypt. Meanwhile, I'd met George Martin, the legendary producer of the Beatles albums, to do an interview for a new edition of Student. When I told him of my plans, he said that four-track was out of date and that modern recording now needed at least eight-track equipment. I told Tom to flog the four-track we'd already bought and look for an eight-track. We'd spent £1,350. I was learning an expensive business lesson about getting the best equipment you could possibly afford.

  By the time of my twenty-first birthday I had a magazine, a mail-order business and now I was contemplating setting up a recording studio. We were £11,000 in debt after the first year from the record business and I was struck down by an ulcer. The doctor advised me to take some time out. Tom Newman and I thought moving our studio to the country might be an option. It would be better for my health at least. I bought a copy of Country Life and saw an advert for an old English manor house at Shipton on Cherwell. It looked ideal. I was bowled over the minute I clapped eyes on the place. I desperately wanted to buy it and hatched plans for a 16-track studio. The bank agreed to give me a loan and I bought the Manor on 25 March 1971.

  In October 1971, as we advertised waterbeds for sale in our shops, there was an extra little note on our ads: 'We have a quiet studio in the country now, so if you're going to make a sound and you want to relax when you do it, ring us.' The studio was ready to rock. And it did.

  The recording studio began to attract the kind of musicians we liked to hear. The decision to make it a 16-track studio was imperative, as bands were becoming more sophisticated. Instead of simple bass, drums, guitar and vocals there was now more dubbing and overlaying of different sounds and textures. We soon realised we would need to have a 32-track, 20-channel sound desk to meet the increasing demand, as recording technology and the evolution of keyboard synthesisers allowed new forms of musical expression and way-out sounds. We brought in leading sound specialists Westlake Audio from Los Angeles to design the studio – with Dolby sound – and bought only the latest kit. The magic of the Manor was that it was a place where the artists could be relaxed and hang out after coming out of a studio session. It was a stimulating place to stay and we kept the wine cellar stocked up and always went with the flow. If a band wanted a wild party or a blowout, then it was fine with us. That's what helped the juices flow. Since then, throughout our businesses, I have always insisted that Virgin try to create these special places or rooms where people can become inspired and create their best work.

  Almost all of the biggest names in rock and pop music carved their reputations in that studio. The Manor taught me how to run a business and handle creative people. I also learned that not everyone gets what they truly deserve in life. I listened to some musicians with a modicum of talent who go
t a few lucky breaks; others with talent seeping out from every pore who simply didn't make it. I've sat drinking with people who have abused their gifts – and others who have made absolutely the most of some pretty dubious talent.

  It is well documented that Mike Oldfield's debut album, Tubular Bells, was a breakthrough into the big time for the burgeoning Virgin empire. Mike was (and still is) a genius. But he was also an incredibly hard and fastidious worker – and that's something that takes you a long way in life. I remember first hearing an early tape of his material on our houseboat and being captivated by its haunting beauty and complexity. It was mind-blowing that a fifteen-year-old played all of these instruments so beautifully. We tried to get some of the record companies interested but they all had cloth ears and the dinosaur A&R executives turned him down.

  So one afternoon in the pub, I said to our team: 'Let's do it ourselves. Let's set up our own record company and release Mike as one of our first LPs on our own Virgin Record label.'

  Everyone thought I'd had one glass too many. We were still primarily a mail-order business, not a record company. But I persevered. I asked Mike for a list of the instruments he needed and went off to Charing Cross Road and rented them all: drums, synthesisers, guitars and tubular bells. We arranged for Mike to have time in the recording studio, between bookings, in the spring of 1973. He worked night and day, playing all the instruments himself, then sat at the mixing desk with Tom Newman to fine-tune the recording. I had never witnessed someone who listened and concentrated so hard or with such acute attention to acoustic detail.

  Our decision to distribute the record ourselves was shrewd. But it was by no means certain at the time that the gamble would pay off. Virgin Records was a tiny business and it lacked the clout and the distribution of other major players.

  Simultaneously, we were releasing Gong's Radio Gnome Invisible and we were promoting an avant-garde German rock band called Faust. (In typical Virgin Records style, we were giving away the album, The Faust Tapes, for 48p – an album for the price of a single.) But Gong and Faust were to be mere musical footnotes compared with Tubular Bells. Chris Blackwell, who ran Island Records – the company nearest to our way of thinking – loved Mike's music and offered to distribute it for us, and even offered to take it off our hands for a substantial profit.

  It was tempting but we decided to do it all ourselves. It was a game-changing decision and it was incredibly bold. I'm always apt to take the greater risk: a bigger risk for a large chunk of the upside. That's what I learned then, and I still apply a version of this in business today. It might have been sensible to let Island do all the grunt work: the advertising, marketing and delivery to the record shops. But I felt that we had placed our faith in Mike, and should do this ourselves.

  In June 1973, John Peel played the record on his late-night Radio 1 show, Top Gear. This was the first time the BBC disc jockey had ever played a whole side of an LP.

  The next morning the phone rang off the hook with people wanting to lay their hands on the album. It never stopped ringing.

  John Peel was hugely influential – and so too were the music press. The power of the print medium has always played a major part in building the Virgin brand. But I began to understand and appreciate this fully only during the summer of 1973. While the Gong and Faust reviews were lukewarm, Mike Oldfield's were sizzlingly hot.

  The album remained in the charts for five years, selling two million copies in the UK alone. Worldwide this figure was nearer 10 million.

  In November 1972, aged twenty-two, I was speaking to my girlfriend when I penned one of my first lists.

  1. Learn to fly.

  2. Look after me/you/boat.

  3. Entertain everybody with me.

  4. Invite nice people back.

  5. Start getting the small house together at the Manor.

  6. Start buying odds and sods for the Manor.

  7. Work with me on projects/sort me out.

  8. More shops to be found.

  But despite these ambitions it was obvious we were still a small company thrashing around. Most of us were still in our early twenties. We needed professional help, and I began a search for a proper accountant in 1973. I penned the advert myself:

  Virgin Records have, within three years, built up seventeen shops, two recording studios, a large export company, an import company, a publishing company, an agency, a management company, licences in every country in the world, a successful record company and a friendly staff of 150 people. Virgin Records don't have a shit-hot accounts department.

  Virgin Records grew to become the largest independent record label in the world. And, in 1992, after our abortive time on the stock market in 1987, we sold it to EMI for a billion dollars.

  We sailed pretty close to the wind on several occasions in the early days. We just about delivered on our promises, but it was a struggle. Given my time again, though, I'm not sure I would make any changes to the major decisions we took. We were feeling our way into what the brand could deliver. We were waking up to the idea that Virgin's interests lay less in our own enthusiasm for any one business, and more in giving our customers a reason to be enthusiastic about the various things that we did. This, I believe, is why the Virgin model is so devilishly hard for start-ups to copy. Unless you're working in a magical industry to start with – and music in the 1970s was certainly magical – it's hard to see how you can win such loyalty and fellow feeling from your customers as you develop and expand.

  That's not to say it can't be done. But the Virgins of the future won't look like anything we ever did. They'll emerge from the gaming industry, or the social-networking sector, or some area quite unknown to me and my generation. They'll look contemporary, they'll look odd, they'll thrill the kids, scare their parents, and they'll take everyone by surprise.

  Emma, a sixteen-year-old girl, can't afford a mobile phone contract. She's just left school and has started in a hairdressing salon. She isn't earning a lot but she wants to keep up with her friends. She enjoys flicking through the celeb mags, watching Friends, likes Madonna, Janet Jackson and MC Hammer, and she chats regularly to Mark, her steady boyfriend, who's slightly older. He's just landed a labouring job with a building contractor, and he supports a top-flight football club, though he can't afford a season ticket. He enjoys a few pints of lager with his mates. He likes rap and hip hop and wants a heavy sound system for a souped-up Toyota, once he passes his driving test. It's the 1990s. The big phone companies aren't too interested in Emma and Mark – but we are.

  Our entry into the mobile phone business remains to this day one of our brand's finest achievements. By offering prepay phones to young people, we were offering a product that was manifestly not a rip-off, to customers everyone else was ignoring. This proposition harnessed the brand values Virgin had acquired in the 1970s and launched them, through a new medium, at a new generation. This was the moment the Virgin brand went truly 'mobile', transferring, almost seamlessly, not simply from one sector to another, but – even more remarkably – from one age demographic to another.

  We love starting new businesses in unfamiliar sectors, and later in the chapter I'll tell you how our 'branded market venture capital' model really ticks. This business of leaping generations, however, is something of a miracle to me, and I'm not entirely sure how much of it is design and how much is dumb luck. The fact is, our brand has managed to straddle a couple of generations and is well on the way to capturing the imagination of a third. Market research shows that the Virgin brand is the most admired by parents as well as their children. As I get older, the challenge is going to be to ensure that the next generation admire the brand, so that we get three generations enjoying what we do. By then, the power of seventies nostalgia will be expended – and we'll discover whether the Virgin brand really is timeless!

  Our adventures in mobile telephony began in Japan. I was on a visit, and while I was there I asked some young people what the latest thing was. They proudly showed me their mobile p
hones. The Japanese were streets ahead of the mobile game and NTT DoCoMo, a spin-off of Nippon Telecom, had launched mobile phones with limited Internet access. The enthusiasm with which the young people I met had greeted DoCoMo's online games provided me with a clear idea of where the mobile phone was heading. NTT DoCoMo, Japan's largest cellular firm, was the first to get a mass-market Internet-enabled phone on to the market. We needed to be in this game, too.