Richard Branson: Losing my Virginity – The AutobiographyPage 338
April - July 1991
We still had the balance of the contract to pay when Janet (Jackson) delivered her new album, so we didn't stop our search to realise assets. In the aftermath of the Janet Jackson signing, which had caused alarm bells to ring at Lloyds Bank as the saw us take on board another load of debt, Trevor and Robert managed to sell the European licence to distribute Sega computer games back to the parent company, Sega in Japan. We needed the cash and we needed to show the outside world some of the hidden value within the Virgin Group. None of the bankers had put much value on the licence, but we sold it for £33 million. The sale was also perfectly timed: a year later the bottom fell out of the computer-games market, and the yen soared, which would have sliced the value of the licence to practically nothing.
Virgin had acquired the European licence to distribute Sega games in 1988, when we bought the parent company who owned it, Mastertronic. At the time we had little idea of the potential of the computer-games business. All I knew was that Holly, Sam and their friends were suddenly spending a lot of time playing computer games on the television. While Trevor was at MAM he spent time with Sega as he leased out their arcade machines. He felt sure that Sega would be able to draw upon their software expertise to rival Nintendo, and that their new portfolio of small machines to play with at home would sell well. It seemed like a good business to get into.
Mastertronic was only five years old. Frank Hermann had set it up in 1983 and acquired the rights to a number of computer games. At the time he distributed these games, which were on cassette and played on consoles, through newsagents. Frank noticed that a new games series manufactured by Nintendo was selling well in America. He tried to sign up the licence to distribute Nintendo in Britain, but Nintendo had already signed it to Mattel, a French toy manufacturer. Nintendo had a 95 per cent share of the computer-games market in America, so Frank went to see its only other competitor, Sega. He signed up to become Segaʼs British distributor in 1986, and in the first year his company managed to sell 20,000 consoles.
The next year, 1987, Mastertronicʼs sales of Sega were soaring but, given that Sega were charging £55 for a console, Frank needed a partner to finance the sales. Although he could sell the console for £99, he needed a large amount of working capital to finance the capital to finance the gap between the £55 outlay to Sega for supplying the console, which was cash in advance, and receiving the £99 from selling it.
In June 1987 I was telephoned by Roger Seelig, who asked me to come and meet a friend of his, Frank Hermann, who had stumbled into this rather amazing business. Trevor and Simon Burke negotiated to buy a 45 per cent share in Mastertronic, and we put it in with Virgin Communications. Frank and Robert started working together and they bought the licence to distribute Sega in Spain, France and Germany for five years. Their challenge was to build the Sega name from scratch in Europe. Virgin marketed Sega as the cool game to play, and initially we sold it on the basis that, while your younger brother may be happy with Nintendo games such as Super Mario and Gameboy, the smarter games for smarter kids were the ones such as Segaʼs Sonic the Hedgehog. Then, as the market developed rapidly, we found that the younger and younger boys were all buying Sonic: they all wanted to be like their older brothers. Our trick was to position Sega above Nintendo and force them further down-market. And it worked: in Europe Sega overtook Nintendo with a 45 per cent market share, compared with a tiny market share back home in Japan.
By 1991 the sales of Sega in Europe had soared to £150 million, up from £2 million in 1988. By then we were beginning to be rather terrified that the bubble might burst. In order to maintain our position, we had to spend £70 million marketing Sega each year, before the cost of financing the sales. There was always the danger that, because these games were primarily sold to an extremely narrow section of teenage boys, if another craze came along out of the blue, then Segaʼs sales would collapse. Peer pressure ensures that nobody wants to be left behind for a moment.
At home I noticed that Sam and Holly began to grow bored with their computer games. They spent less time tapping away at their consoles and Gameboys. Sam began to listen to music more, and Holly began to do other things. Just as they had turned us on to the idea of buying into this business, so Holly and Sam gave us the first warning signs that the market was topping out. If we stayed in the business we would have to commit to another huge budget for promoting Sega. It was time to sell.
The sale of the Sega licence surprised both the outside world and our bankers: £33 million in cash had to be conjured up for a business on which they had placed no value. This was over ten times our original purchase price.
Before starting discussions to sell the Sega licence, Robert had hived off the small team who wrote the software programmes into a separate company called Virgin Interactive. In 1990 the next wave of technology would be games which were played on compact disc, and Robert commissioned a number of software writers to come up with programmes for CDs. Without Sega and Sonic the Hedgehog to worry about, the tiny team of software programmers that Robert had assembled in America began to devise a new game for CD-ROM technology. They named it “The 7th Guest”, and I noticed that people were growing increasingly excited about it. It was a game that involved battling your way through a haunted house while all kinds of attacks were launched at you without warning.
“Iʼve no idea what happens in this game since Iʼm always killed by the kick boxer in the first room,” Robert told me. “All I know is that these guys tell me that The 7th Guest is going to be big. They say its way ahead of anything else on the market.”
As the world of virtual reality and CD-ROMs expanded and kids fought their way out of haunted houses on their computer screens, I found myself in an equally weird world in which I had to fight off a growing number of attacks that arrived from every side without warning.”
