Weatherbill explained in under 3 minutes.
David Friedberg, Weatherbill’s CEO was on CNBC yesterday explaining the ideas behind Weatherbill.com to the world:
A longer (audio) interview (20 minutes) can be found here. (Thanks to JD for the pointer.)
There has been some noise around the idea that businesses hedging weather risk with Weatherbill online is akin to gambling. If you are interested in my views on the semantics of investing / hedging / risk management / gambling / etc. I would refer you an earlier post. But quick and dirty: if the same business hedges it’s interest rate or credit or currency (etc.) online with the CME or an investment bank, is that gambling or prudent risk management? Making the distinction according to the underlying is just plain non-sensical. Especially when the underlying in this particular case - the weather - is probably the risk underlying that can be least influenced by the actions of market participants (well you can always try I guess! 
). You can buy all the warm days you want, but it won’t make the sun shine any harder.
Anyhow for most small businesses - and many large ones - their financial exposure to weather risk is probably an order of magnitude higher that their exposure to interest rate or equity market risk, the opportunity to manage this pro-actively will be - like for other financial risk management tools before, only moreso - a significant advantage insofar as it reduces business risk, financial volatility and as a result the cost and efficiency of capital. (Which means higher productivity, more prosperity, greater wealth, more jobs, etc. etc.)
Small and medium size businesses are the backbone of most (all?) modern capitalist economies; the democratisation of risk management tools via new information and communications technologies will be a powerful factor underlying the next phase of growth and wealth creation in this century.
***Update***
BusinessWeek gives its take on Weatherbill.
January 18th, 2007 at 10:43 pm
Good pointer on that CNBC video. I had not seen that. David’s continuing to work in the idea that NOT hedging is gambling. It’s not surprising that he’s beating that mantra (did I just mix my metaphors?). When I was doing consulting we always spent a crazy amount of time on risk tolerances and one of the most “sticky” ideas we tried to work into the process was the concept of “failing to hedge is more like gambling than hedging.”
The way I really think about it is “know your true exposure.” It is very hard in business (and life) to really think about true exposure. One of the things that I think weatherbill does right is creating tools to help people understand their weather exposure.
Sean, I took a while over the last couple of days and read a chunk of your previous posts. I gather that you have some pent up thoughts about capital structure. In the post above you mention cost and efficiency of capital as it relates to managing volatility. What about capital structure more generally? If a firm faces significant financial volatility due to hedgable (or quasi-hedgable) risks should capital structures be different depending on their risk management choices?
I don’t intend to be setting you up for the softball answer of, “Companies with highly variable earnings should fund with equity while those who keep volatility low should use dept.” What’s your take on the deeper issues? What are the deeper issues? What’s the cut off… if two companies have similar biz plans but one choses to hedge risk while the other wants to eat risk, should they have different capital structures?
-JD
January 18th, 2007 at 10:46 pm
In my speed to type the above I think I made my “sticky” point confusing. The sticky concept we tried to leave people with was that “hedging is not gambling… failing to hedge is gambling”
Friggin dangling participle got me.
-JD
May 28th, 2007 at 5:42 pm
[…] Ahem…actually…farmers are already able to do that today (and do, as some of the early adopters and first customers) via Weatherbill. Indeed they have recently announced the addition of (quotes on) 170 new weather stations in the US improving even further the granularity of coverage on offer. (Here is my quick and dirty summary of Weatherbill.) […]