Integrated Business Experience - Bixi Goes to New York Case Study Assessement Answer

Integrated Business Experience - Bixi Goes to New York Case Study Assignment

Assignment Task:

BIXI GOES TO NEW YORK

The Public Bike System Company (PBSC) was a private company operating Bixi, a bike-sharing service in Montreal, Canada. Bike sharing services had seen rapid global growth in recent years, and the equipment used for the Bixi system was considered by many observers of the industry as one of the best available on the market. Because of this, Bixi-based systems had been sold by PBSC to a number of cities, including Minneapolis-St. Paul, Melbourne, Washington D.C., London, Toronto and Boston.

In the spring of 2011, PBSC, along with Alta, a Portland-based company that specialized in the implementation and management of bike-sharing systems using PBSC proprietary technology, was involved in a bid to sell a Bixi-based system to the City of New York. A few weeks before the selection of a provider, news had leaked that PBSC was experiencing financial difficulties with its Montreal operations. The contract was worth several million dollars and was crucial to PBSC. The leak had the potential to jeopardize the chances of PBSC-Alta to win the contract.

BICYCLE SHARING SYSTEMS AROUND THE GLOBE

In 2011, bike-sharing services were a booming industry (see Exhibit 1). From 213 bike-sharing systems in operation in 14 countries across Europe in 2008, the total rose to 375 bike-sharing systems in total in operation across all of North America, Asia and Europe three years later.2 With 90 per cent of the systems based in Europe, the growth was anticipated to come from North America and the Asia Pacific region.

Bike-sharing services were offered through systems that made bikes available to users through docking stations spread across a city. They typically operated on a membership-basis, with the membership giving access to the fleet of bikes of a given city. Membership granted users the right to borrow a bike at any docking station at any time of day, free of charge for up to 30 or 45 minutes, and to return it to a docking station of their choice.

The market for bike-sharing systems was fragmented. The main systems in operations were Bixi, Clear Channel, Cyclocity, Next Bike and B-Cycle (see Exhibit 2). Other systems included, among others, Access Card in China, OY Bike in the United Kingdom and France, Keolis in France, and PubliBike in Switzerland.3

To be successful, a bike-sharing system had to be easy and convenient. The network of docking stations had to be large enough to cover a significant portion of the city so that users could ride across the city without worrying about finding a docking station at destination. Membership also had to be offered at the right price to reach a critical mass of users. Because of this, the majority of the systems were relying on advertisement income to cover their operational costs.

In terms of system design, docking stations had to be simple to install in order to make their installation and removal a relatively quick operation. This was especially important in locations where stations were removed in the winter. The bikes also had to be designed and built to withstand the rigours of constant use and exposure.4

Bixi was one system that was easy to deploy, cost-efficient and solid enough to remain operational despite everyday use (see Exhibit 3). Because of the quality of its design, the system had won numerous awards, including the 2009 “Gold” prize in the category “energy and durable development” at the Edison Best New Products Awards. It also ranked as the nineteenth best invention of 2008 by Time Magazine, one position behind NASA’s Mars Rover.5

THE PUBLIC BIKE SYSTEM COMPANY AND THE BIXI SYSTEM

The development of the Bixi system started with a decision made by the Montreal City Council to provide the city with a bike-sharing system as part of “Reinvent Montreal,” an ambitious program that aimed to significantly reduce automobile dependence by 2020.6 Initial funding was provided for the project, with the expectation that the system would become self-sufficient within a year of its launch.

Contrary to other cities that outsourced their systems to outside operators, Montreal planned to run the system itself in order to provide greater coordination with the bus and subway system. The program was also to be funded through membership fees; opportunities for advertisement revenues, which were typically used to cover the operating expenses of bike-sharing systems, were estimated to be too limited in Montreal to offer a viable option.7

The mandate for the bike-sharing system was given to the Montreal Parking Authority. Roger Plamondon, president and chief executive officer (CEO) of the Montreal Parking Authority was put in charge of the project. To fulfill his mission, Plamondon created an independent organization, the Public Bike Sharing Company (PBSC), a private not-for-profit company, and became de facto president and chairman of its board. In this function, he was in charge of promoting and leading the project.

To help him in this task, Plamondon sought the support of Alain Ayotte, executive vice-president of the Montreal Parking Authority and a former director of operations at Coca-Cola Canada.8 Ayotte reported directly to Plamondon, and his responsibilities included the coordination of the project; the implementation and development of PBSC; the establishment of the company’s structure, policies and procedures; and the development of its business plan, budget estimates and international policies.

Unable to find a system on the market that was satisfactory, Plamondon and Ayotte, with the support of the city, decided to have PBSC design and develop a system that would be suitable for Montreal. This system, developed in collaboration with a variety of partners, became Bixi9 (see Exhibit 4). A pilot was conducted in August 2008 to test the system and improve the different components. A full roll out was conducted in the spring of 2009, with an official launch in May 2009.

Although the city had provided $15 million to develop and test the system up front, Bixi was expected to be self-sufficient. The membership fee was established at $78 per season. Members could borrow a bike and return it to a docking station within 30 minutes without any additional fee on top of the membership fee. Additional minutes were charged at a rate of $3.50 for the first half-hour (or $1.75 for the first 15 minutes) and $7 for each additional half-hour. It was also possible to rent a bike without a membership by using a credit card, for a fee of $5 per day or $12 for three days.10

During the first year of operation, PBSC encountered a number of challenges.11 First, the anchors of the docking stations made the bikes vulnerable to bike theft. This required some minor adjustments to the stations, a situation that was resolved within a few days. Another issue was resistance from local store owners who complained about the docking stations taking parking space away from potential customers, a situation that was solved within a few weeks by moving the stations that proved to be problematic and educating the store owners about the advantages of Bixi.

The most important challenge, however, was the management of the system itself. For one thing, it was difficult to predict the flow of bikes ahead of the launch. Because of this, it was common in the first weeks to find stations that were empty (full), preventing users from borrowing (returning) bikes. Montreal being a hilly city, and the bikes being heavy with only three speeds, it was common to find stations totally empty or full at critical hours during the day. This required the establishment of teams dedicated to moving bikes between docking stations to make sure that bikes (or stations with empty docks) were available for users at any time of the day.

Despite these challenges, the program proved to be highly popular, with more than 10,000 members and about a million trips using the Bixi bikes for the first year in service.12 The system also won a number of awards for the way it contributed to improving mobility within the city. 13

The system had been implemented in Montreal without major hassles. PBSC’s leadership was convinced they could replicate their success in other locations. As André Lavallée, a Montreal politician who championed the program put it: “We developed this product for Montreal, but we were very convinced that it’s good for any city.”14 With the support of the City Council, they started to commercialize the system abroad. Bike-sharing systems were growing in popularity, with several cities showing signs of interest: expansion would happen now or never.

INTERNATIONAL EXPANSION

Thanks to its superior design, PBSC was able to quickly secure contracts with a number of cities: Melbourne (Australia), Minneapolis-St. Paul and Washington D.C. (United States) and London (United Kingdom)15 (see Exhibits 5 and 6). For all of these contracts, PBSC acted as the equipment provider for the system; it also offered technical support.16 The company worked with a number of partners for the implementations, including Alta Bike Share, a private company headquartered in Portland, Oregon, which had been created for the sole purpose of implementing Bixi bike-sharing systems.

Results from PBSC international expansion were generally positive, although the experience was more difficult in Melbourne and London. In Melbourne, Garry Brennan, spokesperson for the lobbying group Bicycle Victoria, described the experience to La Presse, a newspaper in Montreal, as “not a failure butcertainly a disappointment.”17 Others, however, were not as diplomatic, describing it as a “nightmare.”18 Part of the disappointment was that one of the objectives for the implementation of a bike-sharing system in Melbourne was to free some space in the transit system. A year later, buses were still full and the bikes were collecting dust. As part of the “one-year anniversary,” the magazine The Age had filmed the most popular station of the Melbourne system for about one hour: only three people borrowed a bike.19

According to Garry Brennan in his interview with La Presse (cited above), a major issue was the fact that the system had been launched in June, at the beginning of winter, when the temperature can go as low as 5 degrees Celsius. The most likely explanation for the poor results in Melbourne, however, was Australian law, which forbade cyclists to bike without a helmet. Users must either carry their own helmet or buy one at convenience stores and vending machines for AU$7. This was a major hassle for users, who had to either buy a helmet every time they wanted to use a Bixi bike or carry their own helmet with them. This was taking a lot of spontaneity away from the Bixi experience.

The system in Melbourne was losing money, but it was not yet incurring losses for PBSC. However, the Melbourne contract was to run until the end of 2013; if it was not renewed and Melbourne did not expand the program, PBSC could not sell more bikes and stations. This was a missed opportunity in the Asia Pacific region, where the market for bike-sharing systems was booming.

In London (United Kingdom), PBSC’s partner there, Serco, experienced several difficulties in making the system operational, leading to overexpenditure. Furthermore, users did not prove to be as enthusiastic as anticipated. This led to an operational deficit of $21 million for 2011. Based on the revised figures, the system was expected to cost more than $414 million by 2016, five times the sponsorship revenues from Barclay’s Bank.20

In contrast, the Minneapolis-St. Paul and Washington programs were considered huge successes by Bixi’s partners in these cities.21 In Minneapolis-St. Paul, the program had received wide support from the community from the very beginning. Part of this success was explained by the fact that Bixi benefitted from lobbying efforts made by its competitor, B-Cycle, in the years ahead of the Minneapolis implementation.22 In Washington, D.C., the program had secured 14,000 members and 500,000 transits only eight months after the launch, exceeding expectations. The city had plans to order 25 new stations for Washington and to double the size of the network in Arlington, Virginia, a satellite city, in the coming months.23

After several expansions in 2010, the following year was to be very busy as well, with implementations in Toronto in May and Boston in July (after a two-year delay).24 Several other North American cities were also to announce their intention to provide their communities with bike-sharing system: PBSC and Alta were likely to be found among the bidders.

Commenting on Bixi’s international expansion to La Presse, an industry observer believed that PBSC had not been very careful when responding to requests for proposals (RFPs).25 The company was very aggressive in its sales pitch and had a tendency to overlook potential problems. The issues encountered in Melbourne and London were illustrative of this point: PBSC had submitted its proposal and later tried to solve problems. Yet, the experiences in Washington and Minneapolis-St. Paul suggested that the company had learned from its experiences.

From the point of view of Plamondon, however, Bixi’s international expansion had been very successful. 26 The system had led to more than five million transits in Australia, Canada, the United Kingdom and the United States. More important, the international expansion provided PBSC with $47.5

CLOUDS IN THE SKY

Despite its international successes, PBSC had become a source of rising concerns in Montreal. To launch its operations, the company had contracted a loan based on forecasts that the system was to be self- sustaining within a few years. Yet, Bixi had lost $5.5 million in 2009 and $7 million in 2010, with no sign of financial improvement in the coming months.27 The Montreal Parking Authority was accountable for any outstanding debt owned by PBSC: this could put the city’s finances at risk. In a context where the city was already dealing with an important deficit, Bixi losses had the potential to become a major issue.

First concerns were raised by the Montreal Gazette in April 2010.28 In short, it claimed that business arrangements with regards to PBSC’s international expansion were still to be worked out. Following the story, a few elected officials, including Richard Bergeron, the opposition leader, started to criticize the Montreal Parking Authority for its lack of transparency with regards to Bixi’s management, including the declared costs of the system. For instance, Bergeron had calculated that each bike in the streets was costing $7,700 when all start-up costs had been calculated, in sharp contrast with Plamondon’s estimation of an annual cost of about $1,000 per bike.29

To clarify the situation, Montreal’s auditor-general announced he would investigate Bixi’s finances. The basis for the investigation was the suspicion that Bixi was causing cash flow problems for the Montreal Parking Authority, in part because of the international expansion but also because of the Montreal operations themselves: Bixi did not have enough users to cover expenses. Its estimations were based on 50,000 members, but two years after launching the program, only 40,000 users had signed up for membership.

The cash flow issue became more critical in December 2010, however, when PBSC was forced to request additional funding from the city, confirming the concerns raised by elected officials and the media. All in all, PBSC requested $25 million in guarantee for its debt related to the launch of the program and $14 million as a line of credit to cover operational expenses. The line of credit was to be used to cover operational expenses encountered by PBSC when it sold the system abroad – to buy parts and pay its providers upfront. Finally, PBSC requested a line of credit of $5 million for performance bonds30, a guarantee often requested by international cities for turnkey projects.31

After intense negotiations, which lasted a few months, Montreal agreed to guarantee Bixi’s loan and credit lines for a total of up to $108 million, with the portion allocated to the loan counting for $37 million and the balance allocated to the lines of credit. As a condition to the agreement, Bixi’s chairman, president and board members were to be appointed on the recommendation of Montreal’s executive committee, which was also to approve Bixi’s budget and a two-year business plan to be delivered within a few months.32

THE NEW YORK BID

The New York project followed an RFP issued by the City of New York in November 2010. The RFP called for “financially self-sustaining, 24-hour transportation that complements existing transit and transportation options.” The program was to start with a 30-station test program to start by the end of the 2011 summer, with a full deployment of the system by April 1, 2012. The system was to feature 10,000 bicycles deployed at 600 stations. When implemented, it was to be the largest bike-sharing system in North America.33

The financial structure of the New York project would differ significantly from other projects, as the city would have no involvement in the financing of the project whatsoever. Citigroup had committed $41 million in sponsorship in addition to providing the financing for up-front capital expenditures. MasterCard had committed to sponsor the program for up to $6.5 million. Not only would the city not finance any part of the program, the winning bidder was expected to share its profits with the city.34

Despite the visibility the New York system would offer, many seasoned bike-share companies did not bid on the project. JCDecaux, which had designed the Paris system, and ClearChannel, which had briefly run a system in Washington D.C., were present at the December meeting for the program but chose not to submit a proposal. This reduced the list of potential providers to two — PBSC-Alta and B-Cycle — with both bidders offering similar systems.35

As one of two finalists, PBSC-Alta was well-positioned to win the bid. On June 3rd 2011, however, the New York Times published an article covering the financial difficulties of PBSC in Montreal.36 The article mentioned that PBSC had been out of operating cash and was on the brink of collapse, to the point where Montreal had prepared plans to pull Bixi bikes off the road. To save Bixi from bankruptcy, Montreal had been obliged to make a loan of $37 million to PBSC and to guarantee other loans up to $71 million. PBSC had also laid off nine of its 70 employees.

This was bad news for PBSC, as the leak could seriously undermine its chances to win the project. Plamondon recognized in a public statement that the company had underestimated how long it would take to secure financing to help pay for its expansion.37 For him, it was a matter of managing the growth. Still, the New York project was important. Bixi was incurring deficits in Montreal, and adding more revenues from international sales had become central to its business plan. PBSC’s leadership had to make sure the publication of the article would not undermine the company’s chances of success.