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Metro Needs a Sharing-Economy, Autonomous-Vehicle, Disruption-Ready CEO

posted Jun 26, 2015, 4:46 AM by Info@ Whitaker   [ updated Jun 26, 2015, 4:59 AM ]
Before the Governance Committee of the Board of Directors of the Washington Metropolitan Area Transportation Authority (WMATA)

Comments concerning WMATA's search for a new General Manager / CEO

April 9, 2015

My name is Stuart M Whitaker. I come here as a stakeholder. I am the founder of a transit users' group called Transiters.com. I am a transit rider living in Fairfax County who sold his last car over four years ago. I am also a member of the broader community that wants to see public transit fulfill its important role in our community. I am a financial economist by training, and spent decades working in the telecommunications industry.

I commend WMATA and this group for seeking public input on the next CEO.

I had the opportunity yesterday to hear a lecture by Lars Peter Hansen, a 2013 Nobel Prize Laureate in Economics, on “Risk and Uncertainty.” This is a topic of great relevance to WMATA. One of the historical observations that Hansen made was that French mathematician Bachelier used random probability to analyze stock options in 1900. This work became the basis for what is now known as the efficient markets theory, but economists didn't know about this work until fifty years later.

Fifty years!

As some of you know, the telecommunications industry and the transportation industry have a number of things in common: both of them are critical to our economy, both of them are capital intensive, and both of them experience the “network effect,” which means for instance that they are more valuable the more people they reach and the more people use them.

In some ways, development of the transit industry is decades behind the telecommunications industry. When I started working in the telecommunications industry in 1980, US daytime cross country calls cost over $1.00 per minute. Telecommunications services were often provided by government owned monopolies -- think for instance British Telecom. While AT&T wasn’t government owned, it was the monopoly provider, with holdings including Yellow Pages and equipment manufacturing, until it was broken up in 1984. Much of the credit for changes in this industry came from innovation and competition from a wide range of sources.

Hansen’s discussion of the contribution of mathematicians to economics is one example of how developments in one field may impact another field. Let me give another example of how developments in one industry affect another industry.

Ten years ago I was on a panel at a conference in Germany with representatives of Yellow Page publishers, who were touting how incredibly profitable their business was. Nine years ago Verizon spun off the Yellow Pages business that it had received when AT&T was broken up decades before. This newly independent Yellow Pages business had a total valuation of about $15 B and was highly leveraged, an indication of the fact that the market believed the business to be a very low risk cash cow. And yet, just three years later, this new business was bankrupt, wiping out all the equity and reducing its total debt from more than $9 B to less than $3 B.

What happened? Google happened. The iPhone happened. The Internet happened. Sometimes, change happens slowly, and sometimes it happens quickly.

Like many telecommunications firms of the past, WMATA is a government owned monopoly. If we have learned anything recently about economics, we should have learned that WMATA and other public transit agencies are not immune to competitive pressures. What happens next is not entirely clear.

While there has been extensive discussion about WMATA operations and safety issues, I want to raise a marketing concern and to do so by talking about work by another Nobel prize winning economist, Daniel McFadden. Forty years ago, McFadden conducted pioneering work in forecasting demand for the yet-to-be-opened Bay Area Rapid Transit (BART) system. A key contribution of his work was to something called “discrete choice,” an example of which involves consumers who choose to either drive or to take a bus or to take rail. They obviously can’t choose all three. Key also to McFadden’s work is understanding that two of the most important determinants of demand are the relative amount of time involved in travel and the relative cost of travel of the available transportation alternatives.

In my opinion, forty years later, McFadden’s work has yet to be well understood and incorporated in public transportation. I have looked for instance at the Metro Scorecard -- injuries, on-time performance, breakdowns, even customer satisfaction is shown -- but nowhere do I see adequate recognition of the fact that public transit is in competition with the automobile or an indication of whether the competitive position of Metro is getting better or worse relative to the automobile. Basically, forty years later, McFadden has yet to be understood.

How is Metro doing vis a vis the automobile? I have personally done work on that question. In Arlington, for instance, I can tell you that travel by rail takes 1.6 times as long as travel by automobile, and that travel by bus takes 2.6 times as long as travel by automobile. Those are not numbers that bode well for public transit in a competitive environment.

Given this, here are my thoughts about the new CEO.

First, we need someone who understands how the competitive world works. For instance, Bill Gates does not use an iPhone, the CEO of General Motors does not drive a Ford, and I don’t believe that Metro's new CEO should drive an automobile.

More generally, I am not saying that the new CEO should have specific industry experience or that the CEO be an economist.

I am saying that the new CEO should be a transit advocate who is customer and marketing oriented and who is able to develop and implement strategies to lead Metro through the changes that are going to come.