Business Stripped Bare (15 page)

One day one of the reps came in to see me. 'Richard, the kids are really getting into this Pac-Man video gaming. Perhaps we should be selling some games, too.'

We started to order computer games directly from Atari – a subsidiary of Warner Communications. The arrival of Pac-Man, a maze-chasing alien who munched up fruit, helped bring in excellent business for years, outselling every other arcade game including the hugely successful Space Invaders, the staple of every single student-union bar in the country. With Tetris, Pac-Man became a starter game for Nintendo's Game Boy, introduced in 1989. In the early 1990s Sega's Game Gear introduced us to Sonic the Hedgehog. Popular games for young people allowed home computer games to lift off, especially in the UK, and introduced a whole generation to computing. The hardware multiplied and diversified at a dizzying rate: the Atari ST, the Commodore 64, the Amiga, the Apple Mac . . . The computer-gaming industry was about to go into overdrive.

Pac-Man was, indisputably, the first computer game icon. We didn't get into our stride until the arrival of Nintendo's Super Mario at Christmas in 1985. It was to become a worthwhile sideline for our stores as they expanded around the UK and into Europe. Software cartridges selling at £15 to £45 offered us a much greater mark-up than music, so computer games and then films – on video, then on DVD – became an increasing part of our range.

The truth is that even from the start our smaller Virgin Records shops made very little money. The stores kept our name in the public eye, and represented our youthful, irreverent brand, but they were unsustainable in the long run. One of my biggest business mistakes – indeed, regrets – was not selling all of our stores sooner.

By 1986, even the Megastores were under threat. Our biggest rivals, HMV, had taken up the cudgels against us and were launching a new store on Oxford Street in June which would stock every record currently available, while Tower Records was opening at a prime site in Piccadilly Circus.

Undeterred, in March we launched our Dublin store, the biggest in the world, at Aston's Quay. We spent £1 million on converting the five-floor 50,000 square foot McBirney's store – and it would be similar to our Megastore on Oxford Street.

The press thought we were mad. Stanley Simmons, a director of Music Makers, pitched into the debate in the Counterpoint section of
Music Week
. 'In my opinion the whole concept of the megastore in UK record retailing is seriously flawed and based on false assumptions.' He pointed out that in the US large retailers were able to negotiate better credit terms and returns that were not available in the UK. And he was right to point an admonishing finger at our fixed overheads – the rent and rates – and our obligation to carry a large amount of stock.

But he was missing the point. Our Dublin store not only stocked specialist classical and jazz, folk and rock music, it also sold music videos, games and computer software. This was where I could see the future of our business. We were now giving the old-fashioned retailers, such as Woolworths, Dixons and Currys, a real run for their money.

Our shop windows and our interiors were dynamic and exciting. If Selfridges could do stunning window design, then we would do it better. When Depeche Mode launched their new album,
Black Celebration
, we had a twelve-foot-high mirror-tiled tower in the window of the Oxford Street shop. It was eye-catching stuff. Inside we began to bring the bands in to perform and play a few songs. They became events in themselves which drove more sales and better publicity.

Our Virgin staff were the key. They were usually music buffs not much older than the customers coming in with their weekly pocket money or cash from part-time jobs. We'd created a cool place to work – and that made it the place to hang out on a Saturday afternoon, too.

Dixons chairman Stanley Kalms was increasingly impressed by what Virgin was able to achieve. We also began discussions with Debenhams to open Virgin outlets in their regional department stores.

The days of the small, please-everybody record shop were numbered, and you can't build a business empire on nostalgia alone. In June 1988 we were approached by WH Smith, and we decided to sell sixty-seven of the smaller shops to them for £23 million, and concentrate on a few Virgin Megastores, including a new one in Paris on the Champs-Elysées. A larger retail experience had some future. But the glory days of our involvement in the music industry were now behind us.

By 2008, the CD as a retail item was terminally ill. Its zenith had been 1999, when the worldwide market for consumer spending on music had been $17 billion a year. By 2005 that figure had dropped to around $10 billion, with digital downloading emerging strongly. (By 2012, the projected revenues are just over $9 billion, with half of this downloaded via the Internet.) The corporate music industry – some owned by private equity houses – became more interested in selling millions of plastic discs rather than supporting their actual artists and talent.

When we set up Virgin Records we funded the recording sessions, manufactured the product, distributed it to the shops and then marketed the band and the music. We would give loans and advances for touring, for making promotional videos, for equipment, props and lighting. We would also advise and look after the careers of our musicians and handle the accounts and the sales.

Did all this work make us future-proof? Of course not. The value of these services has disappeared, thanks mainly to digital technology, the Internet and the arrival of YouTube and social networking.

Digital downloading is killing music? You could have fooled me. The music scene is changing, but it's certainly not dying. The economics of music production today are far healthier than they ever were in Virgin's heyday as a music company. When we built the Manor recording studio in Oxford (where we gave Mike Oldfield his big opportunity) and the Monster Mobile recording truck, it was a massive undertaking. It cost thousands of pounds each day to rent a professional studio, pay for a top-notch engineer and a producer, plus all the wine you could drink and dope you might smoke. Virgin Records' job was to bankroll this upfront – and take the risks. Now a top-quality album can be made on a decent laptop – and then you can send it as a music file over the Net to a myriad of different places.

The cost of manufacturing and distributing is minimal compared to when Virgin Records was promoting Phil Collins, the Sex Pistols, Human League or even the Stereophonics. To make money, we had to sell LPs and then CDs in large numbers, just to cover the manufacturing, printing, shipping and retail costs and the royalties. That business model no longer exists – gone, I think, for ever. Digital distribution is almost cost-free and it's as cheap per album to distribute a million copies over the Internet as it is to send out fifty by FedEx. Economies of scale don't matter to young emerging bands – although they still matter a great deal to the record companies and their shareholders.

If I was a happening band on the cusp of success today, I wouldn't go through a conventional record company. I'd gather a small team of people around me and release it myself. I would consider getting together and sharing distribution, advertising and marketing with like-minded musicians and marketing people. Promotion is as easy as setting up a page on MySpace, Facebook or other social networking sites. Smaller and newer bands will earn less, because record companies will only be able to promote lesser known bands on the back of major artists. But there will be more new music to choose from, and more people will get themselves heard.

Record companies will survive – but they will have to be much leaner, much closer to my 'small is beautiful' business model. They will have to discover genuine talent. If you want to know what the future of digital download really looks like, think of artists like Brian Eno, the producer of Coldplay's most recent album
Viva la Vida
, David Byrne, of Talking Heads fame and – above all – Radiohead.

In 2007, when the Oxford-based band said that they were going to release their album
In Rainbows
as a pay-what-you-like digital download, they were branded as barmy, throwing away their intellectual musical property. For fifteen years, Thom Yorke and Radiohead have been major-selling rock artists. They were out of a record contract, had their own studio and their own server, and so the costs of distribution were minimal. It was a gamble – but it worked out, and 40 per cent of fans paid an average of £3 each for the album, making the band nearly £1.5 million. Not only that, but they have licensed the music and it went on sale as a CD too. Yorke said that as artists the band had made more money out of downloading than all their other Radiohead albums put together.

This kind of economics is smothering the big labels. Madonna is another artist who has taken control of her music in a recent deal with Live Nation which connects her reputation for fantastic live concerts with the promotion and download of her music by a website.

While recorded music has cycled through different formats and various paths to making money have been explored, music will always be something personal and meaningful, resulting in a deeply emotional connection point for people of all ages. As records have been pressed into vinyl, discs and now ripped online, we at Virgin have been heading to the fields each summer with hundreds of thousands of other fans in an annual communal celebration of music and people.

In 1995 Jackie McQuillan and James Kydd called me. 'Richard, we've got a great idea. It'll be a world first, truly cutting edge and will give Virgin Cola, and naturally (by association) all the other Virgin brands, great music credibility, whether they're in music or not. Oh, and we've met some fantastic, professional people who can help make it happen.'

OK, I was beginning to guess where this was going when James added (tongue in cheek, I have to say): 'Richard, we'll be doing it for the kids,' and Jackie threw in: 'Richard, I swear it'll be fucking huge!' I realised that no matter what this great idea was, they'd talk me in to it.

Within a matter of minutes, after they'd filled me in on the details, I found myself saying: 'If I've got this right – V Festival would be the first ever music festival anywhere in the world to be held on two days, on two sites, on the same weekend by swapping international A-list bands overnight on buses – from one end of Britain to another? What a brilliant idea. I'm in …'To others, the logistics of this plan might have sounded impossible to pull off – I decided to put my trust in the team and back their gut instincts on this one.

By working with the most experienced concert promoters in the UK – Bob Angus of Metropolis Music, Denis Desmond of MCD Concerts, Simon Moran of SJM Concerts and Stuart Clumpas of DF Concerts – Jackie and James knew they were talking to the best in the business. None of the parties involved had ever produced a festival like V before but they formed a good rapport, and sometimes that's all you need.

The promoters recognised that the Virgin brand could bring something different: a truly punter-focused festival. A brand that believed everything appearing on site should add value to the whole weekend experience – well-lit campsites, directional signage that actually directed you somewhere, longer bars to make sure there were shorter queues and food that people might, for once, want to eat, and the introduction of Virgin Angels to help anyone out if they needed information or assistance. The attention to detail even got down to bringing in ten times the amount of toilet rolls available on site compared to any other festival. I doubt the promoters had ever had such long, or heated, conversations about toilet rolls before, especially not toilet roll printed with the words 'Poopsie and Cack'– a nice little tribute to Virgin Cola's main two competitors!

Jackie and James, in return, respected the expertise of these experienced promoters. After all, they know how to get tens of thousands of people through multiple gates at the same time without riots breaking out, they know about staging, lighting, the temperaments of artists, and how to ensure the safety and security of running a massive music event while at the same time putting on a great show. Although, in true Virgin style, the team insisted on hiring the friendliest security guards in the business, ones who would be helpful and smile. Now that really was a world first!

I am delighted to say the rapport formed thirteen years ago is still as strong as ever. The UK V Festival takes place every summer during the third weekend in August on two beautiful sites, Hylands Park in Chelmsford and Weston Park in Staffordshire. It is one of the largest and most popular in the UK – attracting over 175,000 music fans in 2007 – and plays host to more than a hundred bands. It's an industry favourite, with the live-music business voting V European Festival of the Year for the past seven years at the annual Live Magazine Awards. Good thing I trusted their instincts!

Fast forward to spring 2006 in the US. It's year two in our fight to launch our newest airline, Virgin America, and there is no clear end date in sight.

While the US Department of Transportation took its time making a decision, the design team kept its head down and continued to create a revolutionary new travelling experience for US consumers. But our patience was frayed. We thought we'd have launched a new company by now.

One day that spring, Virgin USA's Dan Porter, who came to Virgin with extensive expertise in technology and music, rang me up and said: 'Richard, Virgin businesses are all inherently social, whether it's health clubs, mobile phones or airlines. So is music. You've been building incredible communities every summer with V Festivals in the UK, so while America waits for the airline to launch, what do you say to throwing the largest music and art festival on the East Coast? Give Americans a taste of the Virgin brand?'