Yesterday, IBM announced it would be investing $ 3 billion dollars in its Internet of Things group over the next few years. In related news, the company also revealed a strategic partnership with the Weather Company, parent of The Weather Channel, to take weather data and correlated information pulled from connected devices, and create valuable insights for corporations and industries whose bottom line can be affected by weather.
One division of The Weather Company that will directly benefit from the new partnership is WSI, an enterprise weather services, technology, and content creation group. WSI plans to use the wealth of weather information gathered from the combined network of 100,000 weather sensors and the data pulled from mobile devices, connected vehicles, airplanes, and smart buildings, to generate usable business analytics. That information could impact insurance decisions, the agriculture market, the energy and utility industries, as well as the operations of airlines.
In a blog post on IBM’s Big Data and Analytics Hub, product and analytics VP Andy Rice suggests some benefits of the partnership: Helping to predict electricity usage based on air conditioner and heating use, and the impact of weather changes on retail sales.
Shane Belvin, a managing director at Nobel Weather Associates, which deals in the weather options market, explained, “The IBM partnership is really about collecting all the data possible and connecting that with what the weather fluctuations are. There are companies out there that have invested heavily in analytics and algorithms about forecasting, in order to help people exploit the weather.” Belvin referenced, for instance, retailers staging their stores to attract people to buy weather related products ahead of predicted weather events.
The partnership is also likely to affect the weather futures industry.
The weather derivative is a tradable commodity that is often sold over the counter to specific companies looking to hedge against financial losses related to weather events. There a quite a few organizations, like AXIS Capital and eWeatherRisk, that offer agriculture-reliant organizations and energy companies, as well as ski mountains and outdoor amusement parks, an opportunity to mitigate the financial risk of the unpredictable weather through hedging on weather futures. The weather commodity market is quite different than weather-related insurance, which is most often tied to catastrophic events like blizzards, floods, and hurricanes.
With the new partnership between IBM and The Weather Company, businesses will not only have more detailed historical weather data to inform decision making, but may also be able to leverage the information for risk management decisions related to weather commodity hedging.
“I think that IBM is trying to be a warehouse for all this information, have it gathered in one place, and connected with Internet of Things devices, so that companies can start managing weather-related risk in a new way,” said Nobel Weather Associates’ Belvin.
“IBM’s investment in the weather will make it much, much easier for companies to understand how the weather impacts their business,” said Belvin. Adding that IBM will help businesses better quantify the impact of the weather, for instance the impact of when it snows 40 to 50 inches in a year versus 30 to 40 inches, Belvin said the impact of weather on the bottom line will become more clear.
For the weather commodity industry, the result could be more involvement in weather derivatives outside of the traditional industries like energy, utilities, and agriculture. Currently, only 5 percent of the market involvement in weather futures comes from businesses outside that group of three.
As the IBM Internet of Things group gathers more data, and turns it into usable information through its The Weather Company partnership, it will be interesting to see how businesses at the mercy of the weather react. We’ll likely see more products like the NEST connected thermostat, that gather data and try to make life easier for consumers. Also, we’ll probably see companies finding new ways to react to the variability of the weather. Finally, with all this new data in hand, weather derivatives might suddenly get a lot more popular.