If You want A Prime Example Of How Not To Run A Media Company Then Take A Look At The UK’s Virgin Media Where The Big Question Is, As Its American CEO Abruptly Quits, Who Actually Runs The Show?

Philip Stone August 23, 2007

Don’t you just love those stories where the CEO abruptly quits for personal and family reasons, getting a huge payoff including a non-compete clause, and then the media defines “personal” as meaning the man was absolutely fed up with his chairman and vice-versa. That it should happen as the company is trying to sell itself is not exactly what one would call good timing.

Thus another in a long string of shots in the foot from Virgin Media, the UKs second largest  pay TV operator with 3.4 million TV subscribers (Sky has more than double).  The company had put itself up for sale in July after it has received an approach from the Carlyle private equity group and valuations were put at around £11 billion ($23 billion, €16 billion) with John Malone’s Liberty Media said to be interested before everything came to a screeching halt with the subprime crisis drying up credit.

Virgin has been in a very public row with BSkyB, the country’s largest TV pay operator and the squabble resulted in Sky withdrawing three channels from Virgin’s basic service. That in turn caused some 40,000 cable customers to walk away from Virgin in the last quarter alone because of the dispute plus another 30,000 who left for assorted reasons (customer service continues to be a real problem). Virgin is suing Sky but it’s unlikely the case will go to court until the middle of next year.

Virgin also yelled loud and long to the government when Sky in December swooped a 17.7% stake in ITV, the country’s largest commercial terrestrial broadcaster, basically putting an end to Virgin Media’s thoughts of buying  Britain’s largest commercial terrestrial broadcaster. Sir Richard Branson, Virgin Media’s largest shareholder holding a 10.5% stake has powerful political connections and he yelled “foul” to whomever would listen. The whole issue is now in the hands of the competition authorities, who also took a stab at the Murdoch-controlled Sky by saying they would investigate whether that empire has too much influence and sway in the UK’s plurality of news.

CEO Steve Burch joined NTL, as Virgin Media was then, in January, 2006, and saw through its merger with competitor Telewest Global. Then he oversaw the purchase of Branson’s Virgin Mobile Holdings with the company later taking the Virgin name with Branson as its largest shareholder. It seemed on paper as though it was ideally positioned to make a killing, being able to offer four full services from one supplier on a single bill: TV, fixed-line phones, mobile, and broadband internet. But paper and reality are two different things, and it just didn’t work out as the company thought, and it wasn’t only because of the dispute with Sky.

For instance, its broadband customer base grew, but at only half the rate of such rivals as BT, Carphone Warehouse, and, yes, Sky.  Revenue also increased, but the margin on each customer fell because the loss of Sky programming forced the company to offer high-value customers cut-price deals so they wouldn’t leave, too. The company spent some £25 million ($50 million, €37 million) on rebranding including Uma Thurman TV spots, but for all of that, the numbers were just not what they should have been.

Something very wrong was going on, and James Harding, business editor of The Times, summed it up: “It was not Mr. Burch’s management that caused these problems as much as the fact that he was not allowed to manage. Virgin Media is paying the price for a breakdown in corporate governance.”

He also scathingly noted, “The management at Britain’s largest cable company operator has, over the years, distinguished itself in two regards: extraordinary internal dysfunction and undeserved personal payouts. While subscribers have complained of poor service, and investors have fretted about huge debts (some £6 billion, $12 billion, €8.8 billion), a handful of executives seem to have squabbled over everything except how they should be handsomely rewarded.”

Most of the UK media seemed to buy the company’s spin that the parting was amicable and there were few internal differences in opinion between senior management, but The Times begged to differ.  Dan Sabbagh, media editor, said the problem was that Chairman Jim Mooney was making all of the key strategic decisions from New York and Bill Huff, a large investor who also chaired the executive committee and who actually recruited Mooney as chairman, was also daily poking his fingers into who got hired and what got spent.

According to Sabbagh, CEO Burch was, at best, probably third in the decision hierarchy, and there are few CEOs who can operate well in such an environment. And none of that is new to Virgin. Burch was recruited to replace CEO Simon Duffy who was moved into the non-role of executive deputy chairman because it was said at the time he also had disputes with the Huff/Mooney axis.

But don’t feel too sorry for Burch. On the job for just 18 months he walks with a lump sum payment of two years’ salary -- £750,000 ($1.5 million, €1.1 million) - and he has been vested in the 250,000 shares previously awarded and that are worth just shy of £3 million ($6 million, €4.4 million).  And all is niceness in the public statement from his nemesis, Mooney. “Steve has contributed significantly to the transformation of Virgin Media.”

Harding, The Time’s Business Editor, said Burch’s departure is not going to solve the problems at Virgin Media. “The fundamental management problem is not on the executive floor in London, but at the board level in New York.”