Tim Jackson - Virgin King (Text Only)

By the end of 1978, however, the phenomenon of the Sex Pistols had worked itself out. McLaren had made a revolutionary film about the group and its handling, The Great Rock ’n’ Roll Swindle. He had briefly appointed Ronnie Biggs, a former train robber resident in Brazil, as the group’s lead singer; and the group itself had begun to fall apart. Sid Vicious died two months later of a drugs overdose, before he could be tried for stabbing his girlfriend to death with a knife. And Johnny Rotten, reverting to the name of John Lydon with which he had been born, repudiated McLaren as a manager and began an action in the High Court to have his company’s assets liquidated.

For Branson, Sid’s death was a disaster, but Virgin managed to salvage some return on the contract. There was now no longer any hope that the group would become a serious money-spinner for Virgin; but the label still had the rights to the records the Pistols had already made. Draper also went on to release a posthumous album of Sid Vicious songs. More important, however, its association with the Sex Pistols and with punk rock had once again made Virgin a label that young artists would be willing to sign to. Richard Branson had been looking for a hit act that would ‘put Virgin on the map’. Now he had found one. The five years after the end of the Sex Pistols would prove to be the record label’s most creatively successful period. In that single half-decade, Virgin would break and develop into stardom such acts as Phil Collins, Culture Club, Simple Minds, Human League, Heaven 17, China Crisis and Japan – a set of achievements that few independent labels could equal over their entire lifetimes.

While Virgin’s credibility among the professionals of the music industry was rising, however, wider trends outside were pointing worryingly downwards. Inflation, which had been falling under James Callaghan’s Labour government, began once again to look threatening. Economic growth slowed down, and the government suffered a bruising succession of confrontations with the trade unions. Matters came to a head in the ‘winter of discontent’ at the end of 1978, which saw strikes and power cuts. The record industry, as a supplier of a non-essential product, was particularly hard hit. Album sales in Britain dropped by more than 15 per cent in the course of 1978; the industry as a whole began to turn from profit into deep loss.

Virgin, which now had a disparate rag-bag of interests ranging from the record label, management and studios to retail, restaurants and a private island, was forced to look for economies. A quarter of the record label’s fifty-strong staff were sacked, starting with Arnold Frollows, the firm’s respected head of A&R. It was Virgin’s first ever round of compulsory redundancies. The artists’ roster was purged of acts that were making insufficient money. Valuers were sent around the various properties owned by the company – ranging from the Manor in Oxfordshire to the houses dotted around Notting Hill Gate in which the company directors were living – in an attempt to add some extra weight to the group’s balance sheet. An ambitious attempt to build on Virgin’s European success by opening up shops in the United States was abandoned: Ken Berry, originally sent out to build an empire in America, was asked to wind down gracefully the company’s interests there and come home.

The election of a Conservative government in the summer of 1979 made little immediate difference. Margaret Thatcher, the new prime minister, saw her first priority as conquering Labour’s inflationary legacy. It was more than a year before she could begin to claim success, for inflation actually rose from just over 13 per cent in 1979 to 18 per cent in 1980; but the price of lower inflation was sharp cuts in public spending, a rise in interest rates, and a sudden increase in the number of unemployed. The Tories owed their election victory in part to a powerful series of posters, showing hundreds of ostensibly unemployed people queuing up above the slogan ‘Labour isn’t working’. That now became a bitter joke. The only consolation for Virgin was that as times became tougher, other companies were in worse straits.

The task for Branson and Powell in 1980 was to prune back the unwieldy plant they had created. At one point they even resorted to the expedient of inviting in a firm of management consultants to advise them on what to do. None of these reforms, however, had any significant effect on Coutts & Co, the company’s blue-blooded bankers. Coutts flady refused to increase the company’s overdraft; and Virgin’s bank manager began to ask instead when he could expect to be repaid some of what he had already lent.

It was fortunate, therefore, that a significant nest-egg had been set aside in case of bad times. Seven years ealier, before the record label had even been established, Branson and Powell had registered the trademark that would appear on its first few albums – a drawing of a pair of women – in the name of an offshore trust. When overseas record companies or subsidiaries later paid for the rights to Virgin albums, the royalties they were charged could therefore be split into two: a royalty for the record itself, which could be sent to Virgin in Britain; and a fee for the use of the Virgin trademark, which went directly to the trust overseas without incurring the attention of the UK taxman. Branson took advice from Harbottle & Lewis, the company lawyers, so that the trust was set up correctly. Apart from that firm, no outsiders – either companies or people – were consulted on the trust or its affairs.

Such an arrangement might have raised eyebrows at the Inland Revenue, particularly when put into effect by a pair of young businessmen who were still both under twenty-three at the time that the trust was established, and one of whom had already admitted to attempting to defraud the Customs & Excise. Yet this kind of trust arrangement was expressly allowed under British tax law; without it, Britain’s high income and capital gains taxes were too much of a disincentive to foreign entities who were considering doing business in Britain.

There was, however, a proviso. In order to avoid any liability to tax, it was important that the trust’s beneficiaries should all live overseas. Under UK tax laws, beneficiaries who lived in Britain could be taxed on their share of any capital gains that the trust made – even if they received no money from the trust. Their status as a potential or a future beneficiary could land them with a thumping tax bill. So the trust had to be set up either so that Branson and Powell and their families were not its beneficiaries, or so that no capital gains were actually made. The first of these conditions was hard to achieve, since the two men wanted to benefit from whatever financial success Virgin might achieve. The second condition was easier: as long as the trust simply held on to the income from the trademark it already owned, and did nothing that would ‘crystallize’ its capital gains, it could remain legally safe from tax.

The trust had discreetly accumulated substantial sums of money between the 1973 launch of the record company and the later decision to change Virgin’s trade mark from the twins to the handwritten logo with the big capital ‘V’ that the group uses to this day. When Coutts pulled the plug on Virgin, therefore, Branson suddenly suggested to one of the company’s financial people that they should approach the Bank of Nova Scotia. BNS, he said, held deposits in the Cayman Islands which Branson himself controlled. The bank would be willing to allow the company in London to borrow over £1m using those overseas deposits as security. That loan helped Virgin survive the recession.

FOUR

Media Mogul

BY THE SPRING OF 1981 it was almost ten years since Richard Branson had closed down Student magazine to concentrate on selling records by mail-order. A great deal had happened since then. Virgin had established a record label, a studio business, a chain of shops, a music publishing house; and although 1980 had been a miserably difficult year, the company was clearly beginning to prosper. Yet Branson had never conquered his early ambition to be a newspaper proprietor. For a man whose attention span was as short as his, there was something alluringly immediate about a business whose product was made one day, sold the day after, and discarded the next. The newspaper industry had a further attraction, too: newspaper proprietors had influence and respectability that would always be denied to the owner of a mere record company.