Today’s Forecast for the Weather Business: Increased Revenues and a Focus on Innovation

Everybody talks about the weather, but these days a lot of people are also figuring out how to make money off it. In many different ways — on cell phones and landing pages, at the B2B level, as a hedge tool — weather is assuming a prime spot in the most innovative parts of the economy.

In recognition of the general public’s appetite for weather news and information, Facebook, for example, is putting weather forecasts on its event and other pages. Google has recently made a move to leverage weather by winning a patent for a new advertising system that bases its content on the global position of the user and corresponding weather conditions.

And The Weather Company — a weather media firm based in Atlanta — is parlaying its devoted fan base and scientific muscle into a variety of products and services, including original broadcast and web programming, apps, a content deal with Twitter and a developing line providing weather data to foreign governments.

Weather data once fell mainly under the government’s National Weather Service. But the field of commercial weather has grown to include 350 companies whose combined annual revenues in the last two years has increased by 50% to an estimated $3 billion a year.

There are practical reasons for weather’s ascent — including more air travelers and more people seeking a forecast before leaving for the weekend. Business has a vested interest in weather as well: One study found that a third of the U.S. gross domestic product is directly or indirectly affected by forces of weather or climate.

“Private weather services are being fueled both by the fact that there is a real economic imperative for better forecasting, but also, it’s one of those things that feeds on itself,” says Wharton marketing professor Robert Meyer, co-director of Wharton’s Risk Management and Decision Processes Center. “There is a much higher awareness than there used to be. As bad as they are, big events like a major snowstorm or hurricane are enormous publicity vehicles for The Weather Channel. Consequently, once you get used to watching weather services, and as people begin downloading weather apps, there is a much bigger supply.”

Heightened interest comes, too, from the fact that weather has unfolded lately with an irresistible dramatic narrative. “The weather has been almost like an exciting sports season, a big rivalry with a lot of last-minute shots,” says Jonah Berger, Wharton marketing professor and author of a new book titled, Contagious: Why Things Catch On. “In the past, there wasn’t the frequency of major events or unusual situations that there has been recently.”

Because of the growing debate over climate change, weather “has more political edge than it did before,” Berger adds, “but I’m not sure that’s the reason people talk about it more. I just think people are always looking for surprising new things, and the weather has become much more surprising lately. One big storm makes every following storm get more attention. People wonder, ‘Will it be bigger than we thought?’”

Weather, Inc.

It is difficult to calculate the size of the entire climate- and weather-related industry, since many of these companies are privately held. But Rich Jeffries, director of the COMET program of the University Corporation for Atmospheric Research (UCAR), estimates gross sales at $3 billion, and the worth of the entire industry at $6 billion. Entities range from small consulting companies to larger commercial forecast groups — including media firms such as The Weather Company — serving the energy, agriculture, building, insurance and other sectors.

Jeffrey Lazo, an economist with the UCAR, is lead author of a 2009 study showing that U.S. adults access an annual 300 billion forecasts. Why wouldn’t businesses be looking for ways to monetize something with that kind of interest? “As an economist, my perspective would be that, like any industry, [businesses] are becoming more engaged as there are more opportunities to make a profit,” says Lazo. “Given advances in meteorology, modeling and computing, private companies can do a lot of value-added work for specific clients that the National Weather Service can’t — and shouldn’t.”

Referring to Google’s latest initiative, Wharton marketing professor Pinar Yildirim notes that “consumers engage in different activities and consumption patterns based on the weather. In the same fashion, unexpected weather conditions can result in high-volume sales of items in a short period of time.” This technology can help “with accurately detecting seasonal needs of consumers — the first snow of the year, the first beautiful day out, the first really hot day. Reminding consumers of swimwear, new skis or snowshoes when the ‘weather conditions are right’ is a good idea.”

Similarly, she adds, “the likelihood of engaging in outdoor vs. indoor activities will have different appeal in different weather conditions. A cold rainy day may be perfect for the movies, but 75-degree weather may be perfect for dining outside. Based on the local weather, Google might provide more ‘weather accurate’ ads and increase ad effectiveness.”

Another corporate entity that is actively capitalizing on heightened interest in the weather is The Weather Channel, which renamed its larger corporate entity The Weather Company in October to reflect a shift in scope well outside of the traditional cable channel upon which it made its reputation. (The television part of the business is still called The Weather Channel.) Increases in accuracy and the ability to pinpoint extremely local forecasts have opened up a variety of new applications, says chairman and CEO David Kenny. Being able to collect and apply more data has “made the investment more worthwhile. We have better forecasting, accuracy, timelines and resolution, which means we can do very precise locations, and we can use that in a lot of different ways.”

The same hyper-local weather reporting can be found on sites like WeatherBug, which offers a choice of data gathered by several weather stations within two miles of each other. Accuweather.com allows users to filter information according to special interests, such as hobbies, allergies or other concerns. A forecast for April 8 in Cleveland, for instance, carried an “advisory for hair frizz.”

Knowing who is watching, where and under what weather conditions means smarter customer prospecting. “Our best advertisers are beginning to build models to understand how location and forecast drive sales,” Kenny says. Last week on The Weather Channel site, clicking on a warning about a “possible tornado outbreak,” for example, started a video with local content — a commercial for pastel-spring paint colors that could be bought at a local Lowe’s shown on a map to be within walking distance of the viewer. But the editorial content that followed turned out to be about potential weather hundreds of miles away.

Understanding who is watching and why is a concept that has recently tested The Weather Channel — and the patience of some of its viewers. Available in 100 million U.S. homes, the channel under its previous chief executive began developing programming that was less related to weather than some liked — a reality show on lifeguards, for instance. Some of those shows will stay, but they will be joined by other long-form documentaries. The 2013-2014 season will feature 20 series (including “Lifeguard!”), up from eight.

“I would say that over the last few years, we have worked to find out where the boundaries are and to understand our covenant with our core audience,” notes Kenny. “It needs to be about weather, nature and science, and feature interesting characters. We’re definitely learning the entertainment part of the business.” Online weather videos are short — three to five minutes, conforming to the industry’s perception of the online attention span. “We’ve seen a big increase in video starts. We’re now a top-15 video site after just a few months of programming.”

With business moving decisively onto mobile platforms, The Weather Company isn’t being left behind. Its app has been downloaded 106 million times, Kenny notes. The pitch is enticing: “Expect rain to start at 3:15 [p.m.]“– No more guessing! If your weather conditions (snow or rain) are changing within 6 hours, we let you know not only the chance of precipitation, but also the exact time it will happen.” Call it relationship forecasting.

The other important relationship ripe for growth is international markets. The Weather Company now supplies information to governmental agencies in South Africa and China, and conversations are underway in other countries, according to Kenny. In July, the company acquired one of its main web competitors, Weather Underground — a move decried by some fans as a cultural sellout of a data-driven site to one more concerned with entertainment.

Have recent strategies paid off? The Weather Company — owned by Comcast, Bain Capital and the Blackstone Group — does not disclose financials. But asked about revenue, Kenny says: “Our ad market is more digital than TV. TV is growing, but digital is growing faster. I would say it’s good, healthy double-digit growth across the company.”

Managing Weather Risk

If the public appetite for all things weather is lifting the Weather Company’s fortunes, volatility of the weather itself has buoyed one sector of the financial markets: weather derivatives. Since the first over-the-counter trade in 1997, weather derivatives have been marketed to utilities, insurance companies, hedge funds and others as a way of managing risk.

In 1998, the total weather derivatives market was estimated at $500 million, according to a 2000 paper for the Wharton Financial Institutions Center co-authored by Francis X. Diebold, center co-director. In 2011, the market had grown to $12 billion, estimates business consulting firm PwC.

“The driver of the business is people understanding that while you can’t manage the weather, you can manage the financial implications of the weather,” says Tim Andriesen, managing director of agricultural commodities and alternative investments for CME Group, the Chicago-based futures and options firm. Sports presenters facing rain, utilities dealing with temperature fluctuations, retailers whose shelves are stocked with merchandise that may only sell in a heat wave can use weather derivatives to mitigate risk.

Among CME’s products: snowfall futures, hurricane futures and options. Most buyers are institutional, but a few are individuals, says Andriesen. “I think that from what we see, it’s a bit cyclical with the prevalence of weather events. When there is volatility in the weather, our business picks up. When there is not, it slows down.”

Uncertainty around weather may bode well for weather derivatives. But according to many observers, trade groups and agencies, the U.S., the traditional leader in meteorology, isn’t keeping up with the kind of forecasting on which the entire weather industry depends.

“The past 15 years have seen marked progress in observing, understanding and predicting weather. At the same time, the United States has failed to match or surpass progress achieved by other nations and failed to realize its prediction potential,” states a draft white paper prepared by the Weather Coalition, a consortium of trade groups, private weather companies and universities. “As a result, the nation is not mitigating weather impacts to the extent possible.” European forecasting systems are “consistently out-performing” their U.S. counterparts, notes Raymond J. Ban, the Weather Coalition’s co-chair.

The European Centre for Medium-Range Weather Forecasts [ECMWF] model, for instance, predicted that Hurricane Sandy would come ashore about three days before the U.S. came to the same conclusion. What is the European advantage?

“The ECMWF … utilizes an IBM system capable of over 600 teraflops that ranks among the most powerful in the world, and it’s used specifically for medium-range models,” according to an article in the journal Ars Technica. “That, fundamentally, is the reason their model frequently outperforms the American one. The U.S. National Weather Service’s modeling center runs a diversity of short-, medium- and long-term models, all on a much smaller supercomputer. The National Weather Service has to do more with less.”

With several federal agencies dealing in weather, and private-sector weather companies growing in size and sophistication of services, Ban says that it’s time to “step back and take a look at how the enterprise works, so we can see who does what and how we do it [to] ensure [that] we can get the greatest value, eliminating duplication and inefficiencies.”

Ban expects the Weather Coalition to release specific recommendations, perhaps for an overarching coordinating weather authority, within weeks.

Some aspects of the weather production line come with expenses that private industry currently might not be able to recoup. “On the ‘back end’ of the value chain, the private sector has found it difficult to develop business models that justify the necessary investment,” notes Ban. This means that “in areas such as environmental observations, global modeling and supercomputing capability, ‘we the people’ will likely need to make those investments for some time to come.”

The Weather Company’s CEO Kenny sees a role for everyone engaged in meteorology — public or private. “I certainly believe it’s important that there be some public infrastructure for basic weather. That said, I do believe in a private sector with the ability to monetize and commercialize, and that has a chance to reinvest,” says Kenny. “…Capitalism has always allowed for added investment on top of the public domain. I think we’re able to keep up and move faster and adopt social media with technology, and work at a different speed than government does.”

An Engaged Public

The weather also provides for an interesting mix of science and religion. On the one hand, hot spells and droughts stoke arguments of believers in biblical prophecy: 36% of Americans polled in a 2012 Public Religion Research Institute survey said they believed recent natural disasters were evidence of what the Bible calls the “end times.”

On the other hand, weather is commanding increasing attention for its long-term scientific implications. “The link between climate and weather has captured people’s attention,” says Kenny. “It’s less debatable than it used to be. It’s not just an issue at the polar caps.” Indeed, a survey conducted by the Yale Project on Climate Change Communication released in October found 74% of Americans agreeing that “global warming is affecting weather in the United States.”

Whatever the sophistication of forecasting and the ways in which it is delivered, the need to connect with weather isn’t abating. For example, weather reports more than ever seem to lead the evening news shows, both local and national. Their prominent place on news casts is for a specific reason: When local TV stations know they will all be carrying a report on the same shooting or warehouse fire, they need something to differentiate themselves from each other. That often means a weather tease delivered with great suspense at the top of the broadcast.

“The placement in a show is done through research that determines what drives the highest ratings,” says Anthony Wible, managing director of media and entertainment at financial services firm Janney Montgomery Scott. “People care about the weather and traffic to get their day going. By hooking someone in with this information, the program can hope to keep the viewer for the rest of the program — even if the remainder of the program is a commodity.”

Alan E. Stewart, a weather and climate psychologist with the University of Georgia, points out that the heightened interest in weather may have more to do with proximity than anything else — proximity to new technology, but also, to mother nature herself.

“One of the things that has happened since the 1980s is the country has grown by a third, from about 220 million to 300-plus,” he says. “There are more people who can be affected by the weather, especially when you look at our desire to live along the boundaries — that is, to live on a lake or coast line, or by a river or in view of a river. When you have that kind of growth, when a noteworthy weather event occurs, the social impact is going to be magnified.”

Citing Knowledge@Wharton

Close


For Personal use:

Please use the following citations to quote for personal use:

MLA

"Today’s Forecast for the Weather Business: Increased Revenues and a Focus on Innovation." Knowledge@Wharton. The Wharton School, University of Pennsylvania, [10 April, 2013]. Web. [21 April, 2014] <http://knowledge.wharton.upenn.edu/article/todays-forecast-for-the-weather-business-increased-revenues-and-a-focus-on-innovation/>

APA

Today’s Forecast for the Weather Business: Increased Revenues and a Focus on Innovation. Knowledge@Wharton (2013, April 10). Retrieved from http://knowledge.wharton.upenn.edu/article/todays-forecast-for-the-weather-business-increased-revenues-and-a-focus-on-innovation/

Chicago

"Today’s Forecast for the Weather Business: Increased Revenues and a Focus on Innovation" Knowledge@Wharton, [April 10, 2013].
Accessed [April 21, 2014]. [http://knowledge.wharton.upenn.edu/article/todays-forecast-for-the-weather-business-increased-revenues-and-a-focus-on-innovation/]


For Educational/Business use:

Please contact us for repurposing articles, podcasts, or videos using our content licensing contact form.

 

Join The Discussion

No Comments So Far