Hong Kong’s MTR (Mass Transit Railway Company) is one of the most profitable transit systems in the world. Rider fares amount to roughly 186% of its operating costs.

In comparison, Toronto recovers about 70% of its operating costs from fares and New York recovers 57%. This means that in the latter two cases, government subsidies are required to keep the systems in operation.

On top of this, Hong Kong relies on a unique “rail plus property” model, meaning that they also use the profits from real estate development activities to fund transit expansion. Here’s more on how it works:

"In a value capture scheme, MTR is granted low-cost land around its future stations [from the government]. It then develops the land and uses the profits to pay for system expansion. Through this system, MTR has managed to build subways and elevated rail lines throughout the islands that make up Hong Kong, largely paying its own way."

Overall, this seems to make a lot of sense. Which begs the question, could this model - specifically “rail plus property” - be exported to other cities?

NextCity asked this question with respect to New York, but came up with 3 problems: first, New York has an operating shortfall, unlike Hong Kong; second, New York doesn’t have the same amount of government owned land; and third, construction costs are way higher in NYC.

The first thing that comes to my mind is, why are Toronto and New York so bad at farebox recovery? Our infrastructure is not self sustaining; we’re reliant on government handouts.

Looking at fare pricing, there’s a big difference between the cities. Hong Kong charges based on distance traveled, whereas Toronto and New York charge a flat rate. Intuitively, dynamic pricing makes sense, since you’re then able to capture shorter rides that would otherwise be replaced by walking (or other alternatives) and you capture more value during longer rides.

The other big difference is the hyper density of Hong Kong, since we know there’s a correlation between urban density and transit ridership. I would assume that the demand for most of their rail lines is fairly high. And it’s for this exact reason that I’m opposed to the new Scarborough subway line here in Toronto. Building subways in areas of the city without the densities to support it will only exacerbate our farebox recovery problem.

As for the other two points regarding government land and high construction costs, I have to believe that there’s a way to create a “rail plus property” model that circumvents these concerns.

For one, why does it have to be government land? Could we not reward developers with additional density if they build a subway station in the basement of their new building or contribute to a transit fund? The city already allows additional density near subway stations. Why not do the same for locations where we simply want a station?

Transit is too important not to get right. I hope Toronto will soon understand that.

When I was looking into grad schools as an undergraduate at the University of Toronto, I specifically wanted a program that would allow me to study both architecture and real estate development. My goal was to combine the disciplines and create a new hybrid profession.

In my pricing class this morning we looked at the strategy used by Radiohead with the release of its In Rainbows album. For those of you who aren’t fans, what they did was offer up the new album via their website on the basis that customers could pay whatever they want.

At first blush this probably sounds ridiculous. But if you break it down, it turns out to be pure brilliance.

First, it’s important to understand how pricing overall works in the music industry. In the olden days when people still bought CDs, an artist might make 15% of that sale price. So if you buy an album for $14.99, the artist’s royalties would be in and around the range of $2.25. The rest goes to the record label, their overhead and so on.

With the advent of iTunes, artists still make around 15%. But now a typical album costs $9.99. This is because overhead costs are lower for an online-only store. Still, the artist now only makes $1.50 or so per album sale.

In case the of Radiohead, their record label contract had expired and so they decided to self release In Rainbows. This obviously means that they were able to cut out a lot of overhead and other expenses. But would it not have been better to just sell the album for a fixed, but discounted, price?

The thing is, when you give people the option of paying nothing, you maximize your potential distribution. This is good when you’re trying to sell concert tickets, merchandise and other revenue producing items in the future.

But interestingly enough, when you give people the option you also maintain a business model. In this case, it turns out that, on average, people paid over $3 per album. This may sound irrational, but people do it for a number of reasons: because they’re big fans, because they want to support the artist, etc.

Whatever the reason, Radiohead actually brought in more per album than if they had gone through a record label and/or sold through iTunes. In fact, In Rainbows netted the group over 8x more than their previous album Hail to the Thief - which was released through a record label. 

This got me thinking.

What other markets would be well served by a pricing model such as this? Could you make parking a pay what you want service? I know that Shakespeare in High Park uses the model. So does it only work for artistic markets where people feel an emotional connection? I certainly don’t think we could sell condos using this approach.