by Bower, Tom
In his search for new ventures, he revisited past failures, especially Britain’s national lottery. The combination of a vast cash flow and perpetual publicity by unveiling that week’s winner as a ‘Virgin Millionaire’ would undoubtedly have guaranteed Branson’s fortune. To deflect those suspicious of his personal enrichment, Branson had called his supposedly non-profit company the ‘People’s Lottery’. Not everyone was persuaded by his apparent altruism. The first rejection of his bid in 1994 in favour of Camelot had provoked Branson’s tearful anger. His second bid was rejected on similar grounds, amid questions about his suitability. In-between was the libel trial destroying the reputation of Guy Snowden, the American founder of Camelot. Ignoring his promise not to make a third attempt, in spring 2008 Branson sought partners to win an auction for Camelot, which was valued at about £450 million. After his attempt to raise sufficient money from Dubai International, a $12 billion wealth fund, failed, he withdrew.
Successive disappointments risked damaging Virgin’s image. Although his admirers at Forbes magazine had in 2002 rated Virgin as the fourth-best marketed brand in the world and probably the best in Europe, diversification was jeopardising the brand. Pertinently, after the death of Steve Jobs, Branson praised him as ‘the entrepreneur I most admired’. Both Jobs and Branson understood that brands created premium value, but the Apple boss focused on the innovation of a few unique products. He avoided Branson’s scattergun hunt for a windfall. While Apple’s reputation continued to grow, the Virgin brand was losing its youthful allure. Virgin had become mature and mainstream. The fizz had gone. Away from the interaction of a buzzing office and street culture, Branson was relying on managers regarded as conventional rather than adventurous. Belatedly, he realised they had squeezed the pips of Virgin’s original rebellious spirit. With them, he struggled to rekindle the zest and reinvent Virgin’s image.
His catalyst for regenerating the excitement was Virgin Galactic. In America, advertisements promoting Virgin Atlantic and Virgin America regularly featured the space pioneer offering relaxing intercontinental travel. The mocked-up images of the tycoon flying on a Virgin Galactic spacecraft encouraged American commentators to exaggerate Virgin’s empire as consisting of anything between 200 and 400 companies with an annual turnover, according to Forbes, of $17 billion. Branson’s publicists never contradicted the hyperbole. Contrary to the public’s perception, Branson owned only half of Virgin Atlantic and half of Virgin Trains, and only a small percentage of the other Virgin companies. Adding together the turnover of all the businesses bearing the Virgin name – and less than forty were active – Branson controlled outright at most four major companies with an annual turnover of about £6 billion.
The empire’s seed corn was the Virgin brand, owned by Virgin Group Holdings. Most companies carrying the Virgin label paid 0.5 per cent of their annual revenues for using the brand. In 2009, the licence fees earned about £35 million. Branson’s hope, said Peter Norris, Virgin Group Holdings’ chairman, was to double that income within five years. Future success depended on reglamorising Virgin and attaching the reinvigorated brand to profitable new businesses. Finding an opportunity was down to chance, but the financial crash in 2008 did throw up one unexpected punt – Formula One motor racing.
Hit by losses, Honda abandoned its sponsorship of motor racing. The most prominent casualty was the company’s Formula One team, which was managed by Ross Brawn, an outstanding designer. In the midst of the financial crisis, Brawn’s chance of finding a new sponsor with sufficient money was slim, not least because of the technical uncertainties which would inevitably follow his decision to replace Honda’s engine with one bought from Mercedes. Installing the German engine on to a chassis designed for Honda’s jeopardised Brawn’s chances of winning the championship. Among the potential saviours of his team and 700 employees was none other than Richard Branson.
Trying to coax Virgin into Formula One was nothing new. At their occasional meetings, Bernie Ecclestone, the sport’s ringmaster, had tried to tempt Branson. ‘We would welcome you with open arms,’ said Ecclestone, mentioning Virgin’s guaranteed global exposure. ‘You’re exactly the type of person we want.’ Branson’s reluctance always puzzled Ecclestone. Unknown to the former car trader, who had personally pocketed over $4 billion in cash from the sport, he had overestimated Branson’s wealth. While Branson presented himself as a billionaire, he was unwilling to risk $80 million a year, the minimum required to run a Formula One team. Although Ecclestone paid at least $30 million of the TV rights to the weakest teams, their remaining income depended on attracting sponsors willing to buy media exposure. Champions like McLaren recovered their $300 million annual costs with the help of Vodafone and Santander each paying about $60 million for their logos to feature on the car’s body and the drivers’ outfits. Red Bull, the multibillion-pound global energy-drink company, flourished thanks to the success of its Formula One team. The sport would be ideal for promoting Virgin, but Branson had never been sufficiently rich to play.
The financial terms changed after Honda abandoned Brawn. The news prompted one of Branson’s executives to call Brawn. Decent but not supremely gifted, Alex Tai, a Virgin pilot, was also employed to hunt down new businesses. Brawn’s reaction to Tai’s call was predictable. After the mention of ‘Richard’, Brawn leapt at Tai’s hint that Virgin might be interested in investing millions of pounds. He hurried with Nick Fry, his chief executive, to the School House, Virgin’s headquarters in Hammersmith. Branson, appearing via video conference from Necker, shared Tai’s enthusiasm but dithered about commitment. ‘I don’t see the commercial sense of Formula One,’ Gordon McCallum repeated.
‘Sponsors are as rare now as hens’ teeth,’ Fry grunted after they departed. To safeguard the survival of the Brawn outfit, half the Honda team’s staff had to be dismissed.
Over the following days, Branson was urged by Tai to take the risk. Without any competitors for the sponsorship, Tai said, Virgin’s fees could be minuscule. Branson agreed. ‘We’d like to sponsor the team,’ Tai now told Fry.
Promising sponsorship was, in Branson’s lexicon, an offer to use the Virgin brand without Branson paying any money. Fry grimaced. Hard cash was required, and the deadline was 28 March 2009, the eve of the first race of the season, in Melbourne.
Branson invited Brawn and Fry for dinner at his home, Kidlington Mill, in Oxfordshire. The atmosphere was jovial, but Branson could not mistake the resolution of his guests. Thanks to Ecclestone’s normal contribution to all the teams, they had nearly enough money to start the season but needed cash to get to halfway. Then, they would hope for the best. Branson again refused to commit himself. He would decide, he said, after Tai watched the teams’ trials in Barcelona on 9 March. By then, Branson’s interest had become known. ‘Formula One must tidy itself up,’ Branson commented in response to a newspaper’s inquiry about his possible involvement.
The Brawn team arrived late in Barcelona. The rival teams’ strengths and weaknesses had been registered during their test runs. No one expected Jenson Button, driving the Brawn, to pose a threat. Within minutes of him speeding around the track, the shock was palpable. Button completed the circuit a full second ahead of every other car, thanks to Brawn’s unexpected introduction of a double diffuser. By the end of the day, the car was recategorised as the favourite. Visibly excited, Tai telephoned Branson. Virgin, he said, could sponsor the winner. He urged a deal. Branson called Brawn, again stipulating sponsorship without any payment. ‘No,’ replied Brawn, and flew to Melbourne. Just days before the deadline, Branson offered about £6 million in a mixture of cash and Virgin airline tickets. With the deal sealed, he rushed to Melbourne and headed for the racetrack laid out through the city’s park to watch the Virgin-sponsored team perform in the practice sessions.
Formula One fetes its heroes in a perpetual spotlight. This suited Branson perfectly. Inside the VIP paddock, he basked among the famous personalities. Pleased to have attracted an exceptional media scrum around
himself, he was overwhelmed when Button, driving Virgin’s car, won pole position for the following day’s race. The spotlight intensified on the favourite to win. ‘You’re going to be my other Burt Rutan,’ Branson told Fry. ‘You can pull rabbits out of a hat.’
That evening, the whole team arranged to eat at Nobu. Fry arrived two hours late, to discover that Branson and his family had waited for him, drinking champagne but not eating. Minutes later, Branson headed for the lavatory. On his way back, he stopped by Jenson Button’s table. Suddenly, Button began remonstrating with Branson over his proposition to Jessica Michibata, his girlfriend. Branson returned to his table without Fry noticing the commotion. The following morning, they met in the hotel lobby. ‘I’m going to stop drinking,’ Branson told Brawn and Fry after describing his misbehaviour. ‘And I’ll apologise.’ The race was due to start, and neither man was interested.
Branson’s misfortune was that Button’s anger leaked amid a spate of unflattering publicity about the Virgin boss. The hostility fell on fertile ground. Some Australians were already critical of Branson’s use of scantily clad women to advertise his airline. Others disliked the projection of his face – 100 feet high – on to Sydney Harbour Bridge. To limit the damage, Virgin’s publicists replied to questions about Button’s complaint with: ‘Richard has no memory of anything happening. They had a great night with lots of celebrating.’ But after Button described the incident to Piers Morgan in a newspaper interview, Branson’s spokesman admitted the truth: Branson had been drunk and was ‘embarrassed’. He subsequently gave up drinking for three months.
The season’s opening race ended spectacularly, with Jenson Button and Rubens Barrichello coming first and second in Brawn’s cars. The image of Branson standing between the winning drivers astride the Virgin logo on the car’s white metal body was seen by 100 million people across the globe. Nothing could have prevented him from stealing the limelight and saying things that created headlines. He had pulled off a brilliant deal. The publicity in Melbourne would have been worth about £20 million. Branson paid £200,000 per race and Virgin was the only sponsor of a team that looked certain to win more Grand Prix races. The hot question was whether Branson had become wedded to the sport.
‘I have been friends with Bernie and known him for many years,’ Branson told inquirers. ‘He has tried to tempt us in, and we have been a reluctant bride up until now. It appears we have chosen a good time to enter into this relationship; and I am glad I have resisted Bernie in the past, as timing is everything in life.’ Branson could not curb his habits and offered to improve Ecclestone’s business. ‘We plan to thoroughly enjoy our involvement in Formula One and bring some extra life to it and do things the Virgin way. We plan to be innovative and I want to pursue Bernie and Max [Mosley], not only to pioneer great engineering but also pioneer clean fuels. We have been developing a clean fuel for F1 which works, and hope to introduce it to Formula One.’ He offered to help Ecclestone reduce costs and ‘encourage more brands to join Formula One to keep it exciting’.
Ecclestone barely considered Branson’s comments. He doubted if Branson understood Formula One’s unique engineering or its aerodynamics, and the idea of clean fuels was of no interest. Branson would be automatically excluded from any influence on the business, but Ecclestone did expect Virgin’s car to excite Formula One’s circus.
Instead, Branson posed as a global financier. His investment in Formula One, Branson spelled out, was a contribution towards rescuing the world’s economy. ‘Everyone is just frozen in the headlights of this recession,’ he told the New York Times, ‘and if everybody stays frozen in the headlights, it’ll just get worse and worse. If you get out there and try and invest, we can start pulling the world out of this recession.’ Branson spoke as if £6 million would influence the slump.
Virgin’s victory in Melbourne had been carefully scrutinised by Graeme Lowdon, a British IT specialist. Before flying to Australia, he had established Manor GP Racing as a putative Formula One team for the following season. Watching Branson hugging Brawn, Lowdon identified a man caught by the Formula One bug.
Six days later, he again observed Branson enjoying the spotlight at the Malaysian Grand Prix. Brawn had won again, and the team was being tipped to become the overall champion. Branson’s hopes of continuing the sponsorship the following season for £6 million had disappeared. Brawn would be looking for at least $80 million. The billionaire, Lowdon decided, had to be persuaded to sponsor his own nascent team.
Although neither Lowdon nor his partner, John Booth, were wealthy, their motor-racing expertise had been established in Formula Three. Their chance to enter Formula One had been stoked by Max Mosley, the president of FIA, the Formula One regulator. Mosley planned to introduce new rules to limit every team’s annual expenditure to $42 million, an edict aimed at Ferrari, Red Bull and the other leading teams. Their huge budget, in Mosley’s opinion, deterred new entrants, who were needed after the departure of both Honda and Toyota. He feared that other engine manufacturers – Mercedes and Renault – might follow.
With a $42 million cap and an experienced car designer, Lowdon believed he had a good chance of success. Fortuitously, Nick Wirth, also made redundant by Honda, agreed to develop a car for Lowdon within the limit. To save money, he would design and test the car using a computer model rather a wind tunnel, saving at least $35 million. That still left Lowdon searching for $42 million.
Lowdon introduced himself to Darryl Eales, the managing director of Lloyds Development Capital (LDC), a private-equity group attached to the bank. Over a cup of coffee in Kensington, Lowdon persuaded Eales that Mosley’s proposed new rules gave Manor a chance of success. Financing the team, said Lowdon, should be seen as support for British engineering – a scenario Eales accepted. Over the next eight weeks, said Eales, he would scrutinise the investment and prepare the contracts.
Lowdon’s next stop was Virgin. His contact there was Tony Collins, the chief executive of Virgin Trains, to whom Lowdon had sold his latest invention – wireless internet for passengers. Collins, a motor-racing fan, introduced Alex Tai, and in mid-April Lowdon and Wirth were pitching in Hammersmith, feeding Tai’s ambition to stay in the spotlight and enjoy more glory. As Tai pondered the proposition, Wirth threw down his chips: ‘Branson will never get the same deal with Brawn again. Brawn will want $20 million next season just for a sticker on the car. And $80 million minimum for the team to be called Virgin.’ Tai remained silent about the reality: ever since Brawn’s third victory, there had been no conversations between Branson and Brawn. Branson had been discarded by the winners as a man without the money in favour of serious suitors, including Mercedes, a Malaysian oil company and several European banks.
‘You personally can move up in the racing world,’ Wirth told Tai. ‘Brawn can’t offer you that.’ Lowdon massaged Tai’s ego: ‘You could be Virgin Racing’s team manager.’ With the same studious manner that persuaded Darryl Eales about Manor’s destiny, Lowdon spelled out how Max Mosley’s new rules should attract Virgin because ‘you can take advantage of the dislocated market’. Virgin’s exposure with Brawn, he said, proved the value of sponsorship. The branding experts had valued Branson’s £6 million investment as already worth £60 million – and rising – in TV exposure. ‘Do you think you can persuade Richard to sponsor Manor?’ asked Lowdon.
To remain in Formula One, Tai knew, Branson’s decision would need to be swift. Mosley’s deadline for applications to enter Formula One’s 2010/11 season was 28 May. To qualify, Lowdon would need to name a major sponsor. His case was strengthened by Eales’s agreement to invest £12 million. ‘The prospects of healthy profits and a return on the investment are excellent,’ Eales would tell the Financial Times.
The bulk of the money depended on Tai’s support. In the course of their conversations, the Virgin executive told Lowdon that if his company became committed, he personally could recruit at least ten other sponsors, especially from the Virgin empire.
‘Richard lik
es it,’ Tai told Lowdon in mid-May. Brawn had won four out of five races, and Branson was loving the global publicity. Mixing with the rich and famous hit a high point in Monaco at the end of May. By the Mediterranean, the VIP paddock was heaving with celebrities, many greeting Branson as a hero. On the day before the race, Branson stood in the pit chatting with billionaires and occasionally boarding their shimmering yachts. That night, he hosted his own party in nearby Villefranche. Brawn had won pole position and, barring a crash, the team was almost certain to win the following day. Virgin’s executives appeared to think of little else other than the image of two cars adorned with the Virgin logo being seen by 100 million viewers.
Nonetheless, Branson’s excitement and Brawn’s success were not the gossip in the paddock. Formula One’s insiders were discussing a spectacular argument the previous night in Monaco’s Automobile Club between Mosley and the team leaders about his plan to limit costs. Mosley’s survival was in doubt.
Mosley’s financial cap had always been opposed by Formula One’s established teams. Led by Luca Montezemolo, the chief executive of Ferrari, the managers rejected any restrictions on spending. Their opposition was the pretext for either ousting Mosley or breaking away from FIA and Ecclestone to establish their own competition. In his fight for survival, Mosley had encouraged Lowdon to embrace the financial cap he wanted to impose on Formula One to wreck Ferrari’s dominance. Inevitably, Ferrari led the coup against Mosley. Influenced by Ross Brawn, who supported the anti-Mosley breakaway, to form their own Formula One business, Branson told Donald Mackenzie, the financier who had bought into Ecclestone’s Formula One, ‘I’m going to back the breakaway.’ ‘Good luck,’ replied Mackenzie, and walked out of Branson’s office. Bizarrely, Branson failed to understand that his own interests lay with Mosley’s scheme, not with the spendthrifts. Ecclestone scoffed at Branson’s confusion.