<p>Stratfor’s Strategic Reality</p><p>Stratfor is, at the end of 2008, a modestly profitable company. On an accrual basis, January-November, Stratfor shows a profit of $40,522 on an income of $7,445,117.78, or about 0.5%. On a cash basis, Stratfor shows a profit of $527,026 on revenue of 8,934,198, or 5.8% of revenue. If we look only at the post April 22 period, the profits are $830,448 on revenue of $6,012,472 or 13%. This represents a substantial improvement in the condition of the company since April, 2008 as well as against October, 2005. In addition, the balance sheet shows a significant improvement as arrears have been dealt withliabilities have been substantially reduced, most notably the elimination of the IRS debt. </p><p>Beneath these positive numbers, lurks a significant problem. 30% of Stratfor revenues in 2008, totaling $2,581,509 derived from CIS/GV business. In the post-April period this declined to about $1,506,254 or 25% of revenue derived from CIS/GV, due to declining CIS/GV revenue relative to publishing revenue. The projection of CIS/GV revenue in 2009 is $1,843,486 against revenues of $8,304,486, down to 22% of revenue. [We haven’t finalized budgets for Publishing revenue for 2009, so we can’t compute the percentage of CIS/GV yet.]</p><p>This means that Stratfor is not yet a publishing company. To be more precise, it is a publishing company in the sense that it is no longer engaged in selling non- publishing products. It is not a publishing company in that it is still producing and delivering non-publishing products. The sequestration of public policy, and elimination of disruptive CIS/GV contracts has helped decrease distractions in products, but still impose a substantial burden. </p><p>For example, NOV, our single largest GV customer, yields $550k a year about 6% of 2008 revenue. A study done by Darryl O’Connor shows that it uses about 10% of Stratfor production capacity. The disproportionate expenditure is because Stratfor has not optimized its system to fulfill the contract. Rather, we absorb the cost inefficiently in our publishing-focused system. Multiply this by numerous other contracts and we see the cost. At the same time, getting rid of the contract would free up time but not cash, as the staff carrying out the work would still be required for publishing—and for mitigating risk to viability.</p><p>The problem of CIS/GV is not only about disruption of the productive process. It also represents a significant revenue issue. Since Stratfor is not selling the CIS/GV product, revenue can only contract. The rate of contraction is only partly under Stratfor’s control. While forecast contraction in 2009 is relatively mild, we can expect accelerating contraction in 2010. That means that over the next two years, growth in publishing revenue will not necessarily equate to growth in Stratfor revenues, since publishing must first replace CIS/GV revenues. This last paragraph is really the issue. We either need to be in the “consulting” business, devoting all the necessary resources to make it successful, or plan for its elimination. Being a little pregnant in it, is nonviable on any continuing basis.</p><p>Profitability vs. Viability</p><p>One thing would appear to be obvious: our current publishing revenues by themselves aren’t enough for us to be is not profitable with our current expense structure. This is both true and far more complex than that statement would suggest. We need to drill down to understand the strategic dilemma we have. Stratfor could become profitable at any point it wished in publishing without CIS/GV. It could do this by cutting expenses, and particularly staff, where expenses were at or below income in publishing and it could do this without immediate fall off of revenue. Indeed, it could potentially hold revenue at current levels for an extended period of time by reducing content delivered somewhat and increasing productivity. Any cash flow issue could be readily dealt with in this way.</p><p>The problem with this solution is the impact on shareholder value and the risk to viability. Prior to April 22, the primary threat to the viability of the company came from cash flow issues. Were Stratfor to simultaneous cut CIS/GV and staff, the threat would come from increased risk to viability. The smaller the staff, the greater the risk that resignations, illness, etc, would move the company to being incapable of delivering product, and therefore to declines in revenue. The precise point at which staff reductions would begin to bleed revenue is unclear. This increases risk as the threat cannot be easily navigated. Nevertheless, that point is out there. </p><p>Stratfor currently rests on 12 pure analysts plus me (and I will show later how the number of analysts and quantity of training is a key metric for shareholder value even though it doesn’t directly correlate to revenue). It would be possible to reduce the number of analysts substantially (and proportional number of writers and other ancillary personnel) while holding current revenue. The key to this would be, first, shifting my focus entirely to analysis, possible in a smaller company making up for cut personnel. Second, retaining the remaining analysts indefinitely, as the cost of recruiting and training analysts would be prohibitive in money and elapsed time. </p><p>The greater the cuts, the more dependent the company is on me. The more trained analysts there are, the less I am a threat to the company’s viability. The more analysts there are the less dependent the company is on any one of them, the more the risk to viability is mitigated. Currently, the loss of a single analyst equals about 8% of capacity. Depending on length of time invested in that analyst, a loss could be many multiples of this. As risk to viability increases, shareholder value decreases until the potential liquid value approaches zero. It is easy to imagine a scenario in which the company has a substantial positive cash flow and is profitable, yet has little or no net worth, when risk to viability is factored in.</p><p>The risk to viability at this moment is no longer cash flow. The risk to viability is that in dealing with the CIS/GV drawdown, we must reduce staff to protect cash flow. We would be confronted either with a return to cash flow risk or increase our risk to viability. The CIS/GV issue is a gun pointed at our head that must be our first focus.</p><p>No question that we need to increase revenues from other sources to offset the anticipated CIS/GV reduction. In April we cut expenses to within our revenue envelope and that assured the company’s immediate survival, but it’s not a way to grow, nor is it a replicable strategy to deal with future decreases in revenue. There is a floor for fixed costs below which we can’t cut and still get out the work. On the production side, with the exception of spinning off the Public Policy people, we’re either at that limit or so close to it that further cuts clearly aren’t a real strategy for us.</p><p>April 22: Strategic Repositioning</p><p>In this context, it is instructive to consider the cuts introduced on April 22. The cuts introduced on April 22 were designed to achieve two strategic goals. The first was to bring expenses into line with revenue. The second was to protect the productive mechanism of Stratfor, mitigating the risk to viability. The method of imposing these cuts is important to understand. From October 2005-April 2008, Stratfor was managed under the principle of “calculated risk.” It was understood that Stratfor’s viability was constantly at risk and that no risk free solutions were available. A series of calculated risks, shaped by the main threat to viability— cash flow—were undertaken, focusing not on cost controls but on cash generation. In calculated risks the assumption was (1) that agility was the key and (2) that failures would occur but be mitigated by rapid shifts of direction. On April 22, Stratfor shifted from a strategy of calculated risk to a strategy of “assured outcomes,” where the goal was the diametrical opposite of pre-April 22 principles. Here the goal was to know precisely what revenue existed and cut costs to within that revenue level—but without threatening Stratfor’s viability on the production side. </p><p>The key was to develop a cash flow model with sufficient predictive value that it would allow some precision in cutting costs. Without that, the risks of cuts would be too high to permit. The following sequence was undertaken:</p><p>1. Identify a high probability cash flow model for publishing. Fortunately, Stratfor had developed a highly predictable sales model, in which Stratfor’s publishing income pivoted narrowly around quarterly sales of $1,313,000. 2. Since cutting costs to within this scope threatened viability, and Stratfor had contractual obligations, added to this pool was CIS/Revenue that had a singular characteristic: the client had a history of reliable and timely payments. </p><p>Other clients were retained, but costs had to be cut to within the first two categories.</p><p>This required cuts of about $200k a month. This was achieved by:</p><p>1. Cutting executives and all those associated with CIS/SRM/GV sales. This generated over half the savings. 2. Cutting the monitoring system that had been developed for NOV and used to serve publishing. 3. Severe controls over all other expenditures, particularly travel associated with CIS sales.</p><p>What was not cut was analytic staff, and minimal cuts were permitted to writers, graphics or production personnel. It should also be understood that only a single overseas placement involved in intelligence gathering was cut (Arturo Sanchez in Mexico). The cuts came from executive, sales, monitoring and travel, and cutting the DC office. The cuts bought Stratfor into cash flow positive by July, and with the OSIS payment, dealt with arrears by September. </p><p>The single most important fact of the cuts is that it did not increase the risk to the company’s viability on the production side. Stratfor had achieved assured outcomes, managing the cash flow threat, without increasing risks to production. However, the retention of CIS/GV was built into this model, including increased pressure on production to service these contracts without the support systems. The model followed form October 2005—use CIS/GV to subsidize the development of publishing was not substantially modified with this exception. Without sales support, CIS/GV could not grow. It could only decline and the expectation is that it will decline over the next two years. Thus, the first challenge of publishing is to replace the revenue lost from CIS/GV. It is only after that that Stratfor will increase its own overall revenue. That is the first and current challenge of Stratfor.</p><p>Facing the Immediate Challenge Squarely</p><p>It must be remembered that CIS/GV is not free money. Therefore, we have the choice of eliminating CIS/GV or structuring ourselves to fulfill contracts efficiently and to build a sales force to justify the restructuring with more contracts. Or we must eliminate these contracts without reducing cash flow. In other words, we must balance revenue growth in publishing to match CIS/GV drawdown. Unfortunately, that alone would leave us running to stay in the same place. Simply doing this will not bring us closer to full viability and liquid value. The above paragraph isn’t clear.</p><p>We currently forecast CIS/GV revenue in 2009 at $1,762,585, down from $2,581,509 or $818,924. There are some complexities in this number (public policy caps, the amount of run rate already reduced and compensated for) however a rule of thumb should be that we need to increase revenue at a rate of $68,000 a month from where it is currently running—this isn’t clear, what does it mean “but that leaves a substantial amount of diffusing labor in place.” The real goal must be a monthly increase in revenue from publishing of $214,000 a month —to simply hold our place and focus down. Granted, we can likely have as our goal 2010 for termination of GV/CIS, but that still leaves us this goal: increase of $68,000 a month in 2009, increase of an additional $146,000 a month in 2010, simply to stay where we are.</p><p>How Stratfor Publishing Makes Money Now</p><p>Stratfor publishing has demonstrated that it can make money and that it can increase the amount of money it makes. Since second quarter 2007, Stratfor consistently made $1,313,000 a quarter, plus or minus about 1.5 percent. </p><p>The Historical Trend tab on the Dashboard has significantly different numbers.</p><p>4Q07 - $1,273 1Q08 - $1,099 2Q08 - $1,324 3Q08 - $1,592 4Q08 - $1,649</p><p>Where does the $1.3MM come from?</p><p>In third quarter 2008, this revenue rose to just below $1,600,000. In fourth quarter 2008, it will rise to just above this amount. On average we have seen an increase of about $100,000. We need to understand how we make money in publishing in the first place, and how we increased it in the last six months.</p><p>Marketing</p><p>Stratfor publishing revenue rests on a simple marketing system. Stratfor differentiates itself from other products in the area of foreign policy by excellence and timeliness. This is demonstrated to the market by a system of free mail outs to opt-in members built up over the years. It is noteworthy that Stratfor began with free daily mail outs to a list of 17 people. The daily Global Intelligence Update was intended to demonstrate our capabilities and be viral. Its first purpose was to advertise consulting services but it morphed in 1999 into generating eyeballs for our website and then revenue. </p><p>Since 1999 it has become a weekly product. Two are produced each week. One focuses on geopolitics, the other on terrorism and counterintelligence. In addition, during a crisis, Stratfor mails out Red Alerts to its opt-inFree list, Paid List and media list designed to call attention to its services and entice people to purchase memberships for the full service.</p><p>The weekly mail outs are substantial effort. Each is about five single spaced pages mailed 50 times a year. That means that each is, over the year, the equivalent of a full length book. </p><p>The weeklies serve a number of purposes:</p><p> It builds the free list, which currently stands at about 130,000. Dashboard FLists tab shows 102,000, not 130,000. The November cohort was 6,700 new signups. We’ve had about 31,000 new people sign up since September 1. [It’s important to note that we’re getting new people signing up, but those are gross adds, not taking into account unsubscribes, sales, bounces, etc.] In November it grew at about 7,500 members. Since September I it has grown by about 30,000 members.  This is the list to which Stratfor campaigns to, converting free list members into paid list members.  The free weeklies, along with a group of other products designed to attract media attention, generates notice in media, driving walk-up sales as well as new free members and trial memberships  The free weeklies are widely republished on blogs and in other media, drawing more attention to Stratfor.</p><p>The use of the Weeklies to build free list membership represents a significant level of effort from available task without significant exogenous costs. Therefore it is in keeping with the strategy of controlling cash flow while building revenue. [This paragraph isn’t clear.]</p><p>Pricing</p><p>Price and terms of sales vary. Sticker price is $39.95/month, $99/quarter, or $349/year. Individual memberships range from $19.95 a month to $349 for a year to $595 for a three year membership. Currently, the most popular price is $199 for 15 months, accounting for about 60 percent of sales overall. [The 60% figure seems way high. Where did you get that? Is that by headcount or dollars? Either way, seems high.] (attach matrix of possible prices and terms).</p><p>Institutional memberships range in price from $1500 for a five seat license to $470,000 for a 9,000 user, one year license, roughly $50 a seat.</p><p>The $349 price was derived in 2005 based on a triangulation of the prices of what reader surveys identified as the three periodicals almost all read: the New York Times, the Wall Street Journal and the Economist. At that time prices ranged for non-promotional annual rates from $200-550. We selected $349 as a triangulated price and a price from which we could comfortably discount to $199.</p><p>Publishing Sales</p><p>Stratfor has maintained increasingly detailed records of sales since 2006. They are addressed in terms of sales rather than in terms of booked revenues or as accrual. Accrual is not fully relevant to the issues being dealt with here. Given the terms of almost all publishing sales, the distinction between booked revenue and sale is not sufficiently significant to render analysis misleading. With our 2 years- for-1 at $349 and 3-year at $597 deals, the difference between cash and accrual is substantial. As you rightly point out later in the Paid List section, we’re living on current cash from future obligations to provide product. That does make a real difference.</p><p>Total Publishing Sales, 2006-2008 2006 $ 2006 % 2007 $ 2007% 2008 $ 2008% Total Sales $4.454 m $5.058 m $6.327 Individual $3.011 m 67.6% $4.012 m 79.3% $4.470 70.6% Institutional $1.443 m 32.4% $1.046 m 20.7% $1.856 29.4%</p><p>Total publishing sales grew by 13.6% in 2007 and by 25% in 2008.</p><p>Individual sales grew by 33.2% in 2007 and by 11.4% in 2008. Sales increased by $1 million in 2007, but only by $810 thousand in 2008.</p><p>Institutional sales fell by 27.5% in 2007 and grew by 77 percent in 2008. This curve is accounted for by the OSIS purchases of a two year contract in 2006, no sales in 2007 and by a sale plus a $175,000 adjustment in 2008. </p><p>Accelerating growth overall is built around the OSIS contract. Were we to remove that from the 2008 numbers, sales would have been $5.867 million, or 16% growth. This is not to regard OSIS as a contingent event. It is likely the most secure revenue Stratfor has. Rather, we should divide the $750 initial sale between 2006-2007 to see the growth curve more clearly. If we did that, 2006 would be $4.079m, 2007 would be $5.433m and $6.327—growth of 33% and 16%. </p><p>Either way, we saw a deceleration of sales in 2008 and most striking was the deceleration in the growth of individual sales, which needs to be analyzed more carefully.</p><p>2006 2007 2008 New Sales $1.519 $2.254 $2.838 Renewals $1.675 $2.143 $1.997</p><p>New sales grew in 2007 by 48% and in 2008 by 25% in 2008. Renewals grew by 27.9% in 2007 but fell by 6.8% in 2008. </p><p>Breakout of numbers by type of sale did not begin until September 2007, so no definitive answer for the deceleration of new sales or the decline in renewals is possible. However, a reasonable hypothesis for the decline in renewals is possible, namely accelerating sales of multi-year subscriptions in 2007 which caused renewal rates in 2007 to decline. Renewal rates haven’t declined, just the absolute numbers of dollars renewed, critical distinction. If the pool available for renewal is smaller because people have been sold New multi-year Memberships, that’s not a negative at all. If this were the case, then we would expect resumption of renewal growth in 2009.</p><p>2007 is when we started selling to the Paid list weekly. That would increase New sales in 2007 and decrease the size of the pool available for renewal in 2007- 2009. Looking at the absolute numbers for renewals consequently is probably less valuable than in looking at the percentage renewals by headcount and/or dollar amount. We also will NOT expect to see resumption of renewal growth in the out years since we’ll again campaign to the Paid list prior to the expiration of their multi-year term, and those people currently on a multi-year deal will be the most likely to sign up for another multi-year deal. The only group that can generate an absolute increase in renewal dollars for 2009 are those that bought single-year Memberships in 2008 and don’t respond to multi-year Paid List campaigns prior to their automatic renewal.</p><p>This whole section on Renewal income probably needs to come after the individual line-item sections in order to make the most sense. This is aggregated information, but I’m not sure that everybody understands the constituent parts sufficiently yet. That’s the detailed information your other sections provide.</p><p>In fact, we do have a forecast for renewals in 2009 of $2.062 million, slightly above $1.997 million. However, excluded from this number are the new annuals subscriptions that were booked in December and will be book in January and February, but which will be renewed in October, November and December 2009. That will likely raise the renewal rate by at least $400,000, bringing us to a 20%+ growth rate.</p><p>And this renewal forecast will decline over time as the pool is shrunk by successful Paid list campaigns. </p><p>What cannot be ignored, however, is that the rate of growth of new, individual subscriptions declined between 2007 and 2008. While it grew at a healthy 25% this was almost half the 2007 growth rate. It points to fragility in Stratfor’s growth rates using current methods of selling that cannot be ignored.</p><p>The paragraph above can tell a misleading story. It’s an artifact of our accounting more than a fragility in our business model. Our 2007 New sales, until 11/27/07, were driven to a huge degree by Paid List sales. And within the Paid realm, we were extremely successful with the $597/3 year deal, about 800 people out of about 12,000 at the time.</p><p>So two points in analyzing 2007 vs. 2008. In your analysis above on Institutional, you rightly point out that the 2-year OSIS purchase should be recognized half in 2006 and half in 2007. The same holds true for the equally material reliance on multi-year Paid sales during 2007. It’s important first to use accrual accounting, which takes into consideration that the $597 deal we sold in 2007 obligates us to produce for 3 years. Accrual revenue recognition is the proper measuring tool to do an apples-to-apples comparison with the 1-year and 2-year deals which account for the vast majority of our Paid list sales in 2008. Second point is to look at the composition of our New Individual sales. In 2008 we’ve shifted the composition away from Paid much more heavily towards Free, Walkup, and Partners. These grow not only our renewal stream but the number of people helping with word-of-mouth as well.</p><p>From 4/15/07 to 12/30/08, our paid headcount has grown by 44% and from 4/14/08 to 12/31/08 it’s grown by 32%. To reconcile the headcount growth with the revenue figures requires presenting the accrual-based figures as well as the shift in revenue composition.</p><p>At a strategic level, incremental improvements in selling to our own lists, Paid or Free, aren’t going to be sufficient to get us where we need to go, but the analysis above, that doesn’t address our growing census, and equally importantly, the shift in composition of sales during 2008, from nearly all Paid in 2007, to a much healthier reliance on Walkup, Partners, and Free List, misses some critical points.</p><p>Dashboard Performance The following summaries publishing sales for the past five quarters, which is the period during which we tracked sales by these categories. During this period, the average quarterly revenue was $1.314m for the first three quarters, [the average of 1273, 1099, and 1323 is 1232. Where do you get $1.314m?] rising to about $1.6million the second two, an increase of roughly $95,000 a month. Note that this table does not include all institutional upsells. Where this is most relevant is in first quarter 2008, where February should include a $175,000 upsell to OSIS, bring quarterly total to $1,274,000. OSIS is excluded in Institutional sales as well.</p><p>Sales by Dashboard Category and Month</p><p>RENEWALS Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Institutional 153 56 116 28 38 102 54 54 66 49 76 99 Individual Annual 116 116 136 122 93 122 102 106 228 155 168 158 Total Renewals 269 173 252 150 131 224 156 160 294 204 244 258 NEW SALES Free List 31 31 48 113 65 34 97 110 65 61 64 86 Paid List 167 105 147 127 17 9 171 67 44 49 41 50 Walk-Up 27 31 34 33 81 65 42 32 33 33 49 116 Partners 15 8 5 4 4 4 18 25 19 46 34 42 Re-Charges 24 25 28 19 26 22 22 25 27 26 28 32 Institutional 22 10 15 15 14 4 2 12 83 13 7 25 Total New Sales 286 210 278 311 208 137 353 270 272 228 222 351 All Sales 555 382 530 461 339 361 509 430 567 432 467 608 Minus Refunds -41 -19 -64 -18 -40 -33 -37 -32 -38 -35 -21 -26 Net Sales 514 363 467 443 299 328 472 398 529 396 446 582 Quarterly 1273 1099 1323</p><p>There is clearly a break point in August, 2008, when monthly sales move consistently about the $500,000 mark and remain there. The Third Quarter of 2008 is also breaks with the pattern that had maintained itself for the previous five quarters of sales pivoting around the $1,313,000 mark. [Again, I’m not sure where this 1.3 number comes from.] We can therefore view the first three quarters presented here as representing one dynamic, and the last two as representing another, clearly driven by the strategic shift of April 2008 as it took hold. </p><p>This can be seen in the following chart which provides monthly averages for the dashboard for the two periods.</p><p>Monthly Dashboard Averages</p><p>Monthly Avg Monthly Avg $ Change % Change New Sales 4Q07-2Q08 3Q08-4Q08 Free List 69 95 26 38% Paid List 82 74 -8 -10% Walk Up 43 66 23 53% Partners 8 45 37 463% Institutional 19 10 -9 -47% Renewals Individual 131 141 10 8% Recharges 24 35 11 45% Institutional 62 87 25 40%</p><p>During the period Fourth Quarter 2007 to Second Quarter 2008, the first period, publishing sales averaged $438,000 a month. During the second period, Third and Fourth Quarter 2008, average sales were $553. Apart from an increase of $115,000 a month, the variability between months declined, allowing us to predict performance on a monthly basis as well as a quarterly basis. This represented maturation in process which both increased revenue and routinized process and therefore outcome. [It’s also important to note that post-April we started to manage to Dashboard targets, effectively using it as a target, not just a forecast. For example, we’d not campaign more than once to the Paid list during a given month when other categories were outperforming expectations. This was the first time that we consciously chose to “forego” immediate revenues in favor of resting a line item.]</p><p>This was also the period in which paid headcount rose from about 14,000 to about 17,500, an increase of 25%. During the same period, sales rose by 26.2%, tracking headcount. However, only $97,000 of increased dashboard sales can be attributed to individual headcount generating categories (Free List, Walkup, Partners, Re-charges), the actual increase is only 22.1%, somewhat underperforming. This differential is attributable to a campaign to dormant free list members priced at $99. Therefore, we can say that the growth in headcount is successfully generating growth in revenue, a critical factor in evaluating publishing performance. [Not sure this is really clear. Paid sales will generate revenue but not headcount growth.]</p><p>In looking at the dashboard numbers, it is obvious the most successful improved category was Partnerships, growing at 463%. This growth was the result of applying Aaric’s campaigning techniques to the Mauldin list. However, given that the performance as due to an idiosyncratic relationship, that COGS is 50% of the sales number, and that the category ranks 7th out of 9 categories in revenue generated, it is important not to regard this growth as strategic. [See comments later below.]</p><p>When we look at the other categories, we can see that growth in two categories drove new sales almost exclusively: free list and walkup, which contributed almost equally to growth, although free list was almost 50 percent higher in absolute revenue. [Should point out that the decline in Paid sales was a conscious decision on our part to deemphasize selling to our existing list because we were generating sufficient cash from other dashboard line items. Could be misleading otherwise.] Recharges—revenue from people signing up on monthly, quarterly and bi-annual payment plans—rose 45%, generating only $11,000 more cash a month, showing a trend needing exploration. [The nature of recharges means that this increase could either a good thing or a bad thing. Because we campaign to our Paid Members who are on monthly plans, trying to get them to convert to annual, a decrease in recharge revenue could actually be reflective of a very successful Paid list campaign. Alternatively because we offer monthly modalities in our Free List campaigns, the increase in recharges could actually be reflective of successful Free List sales. This definitely needs additional analysis, but because the absolute numbers are so small, I haven’t made it a priority as yet.] The most troubling performance was put in by institutional sales, which fell by 47%. A rise in renewals of 40% compensated, but those numbers depended on the timing of renewals—as well as an excelling 91% renewal rate—and therefore doesn’t mitigate the decline. </p><p>At first reading then, the drivers of new sales are free list and walkups and the pressing problem is new Institutional sales. While this is true, drilling into the process and the numbers make this a somewhat more complicated picture.</p><p>Free List Sales</p><p>Free list sales are generated by sending campaigns to all or part of the free list. This is done at a bi-weekly basistwice weekly, which has recently shifted from a Monday-Wednesday cycle to a Tuesday-Thursday cycle based on tests run by Aaric and his team[Days change based on testing as well as holidays, etc. I’d leave out.]. Free list campaigns represents one of the mainstays of publishing revenue. During the first period, free list campaigns generated on average $69,000 [Looking at the Historical Trend page of the Dashboard, this number is way high.] a month, making it the third most important category after individual renewals and campaigns to the paid list. However, when COGS are added (premium books provided as bonuses), Free List revenue were slightly lower, sinking to fourth below Institutional renewals. Until 11/27/07, Free List sales were running about 50 sales/month or $10K as I recall. It was absolutely dead during the summer of 2007. The first book campaign we did was in March 2008. I also wouldn’t introduce COGS into this discussion yet, or at least keep it separate. We’ve also included books with Paid sales, for example, and we’re currently giving your book away with every year+ sale we make, Free, Paid, Walkup, Partner, etc.</p><p>During the second period, Free List sales rose to $95,000 a month on average, $26,000 higher than the first period. [This number is also different than the Historical Trend page shows.] It was also the second highest single sales category after individual renewals. Its growth represented 22% of total publishing revenue growth. </p><p>The picture is somewhat complicated by the fact that $113,000 (averaged out to $18,333 a month) was generated in October by a campaign to dormant members of the free list at a discount price of $99. While enormously successful, the campaigns could not be sustained. Essentially the $113,000 represented a singular event rather than the outcome of the systematic free list process. [Not entirely accurate, all cohorts will ultimately be offered the $99 price after “regular discounting” fails to make headway. Timing will be different because we’ll do one cohort at a time rather than several, but we should see the same percentage spike as each cohort hits this point and we get the $99 buyers.] It will not happen again, although other creative deviations from normal process might.</p><p>When we subtract the $18,333 from the total growth of this period, Free List sales grew only about $8,000 a month, or 11 percent rather than 38%. That means that in terms of systematic production, Free List growth ranked well behind walkups, while its total value, $77,000, moved closer to other categories while remaining critical. It is also worth noting that Free List has carried a COGS of about $20 per sale by offering Fred and my book as premiums. [Some campaigns have, some haven’t. I wouldn’t make a blanket statement about profitability.] We do not know whether these premiums increased sales, however, sales surged in March and April 2008 when special offers on books were made. [There’s no question in my mind at all that the books were a huge driver of the sales success in March/April.] The impact on sales in November and December is much less clear and the use of premiums needs to be studied carefully. [Again, remember that we’re including books with all sales currently, not just Free List.]</p><p>None of this is to say that the free list campaign is unimportant in generating revenue. It is a cornerstone of our current revenue model. But it does raise the question of whether this ought to be a focus of our efforts. Certainly it indicates that new strategies for mining the free list need to be considered, instead of or alongside current strategies. </p><p>Consider this chart: 4.50%</p><p>4.00%</p><p>3.50% p U 3.00% d e n g</p><p> i 2.50% S</p><p> t r</p><p> o 2.00% h o C</p><p> f 1.50% o</p><p>% 1.00% Feb Mar Apr May Jun Jul Aug Sep 0.50% Oct Nov</p><p>0.00% W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k W k 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2 0 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 3 0 3 1 3 2 3 3 3 4 3 5 3 6 3 7 3 8 3 9 4 0 Weeks of Campaigning</p><p>This displays the behavior of each monthly Free List sign up cohort as campaigns to them begin (in the month following signups). By week three, virtually all cohorts yield 0.5% purchases. By week 10 all are at 1%. By week 16, they are mostly at 1.5%. There is clearly a drop off in propensity to buy and by week 27, they can be motivated by a lower price.</p><p>In practical terms, this means that over the course of four months, 1.5% will purchase from Stratfor. In two and a half months, 1% will while 0.5% will purchase in the first three weeks. In this sense, the first three weeks of campaigning are the most effective. We need to examine ways in which to make the first three weeks of campaigning even more successful, by experimenting with a variety of offers and prices. Clearly, that period has the highest receptivity to buying and must be focused on. Receptivity must be exploited creatively.</p><p>Interesting note – during the first 4 weeks of campaigns, we actually sell at a higher price than after the first 4 weeks, $249 then dropping to $199.</p><p>It should also be noted that in spite of substantial increases in the size of the free list, the absolute numbers and the relatively low yield has not created the surge in revenue we would like. Clearly the size of the free list must be increased, but in order to achieve substantial revenue from this strategy, the number of new free listers must increase dramatically and the effectiveness of campaigns must also increase dramatically. Definitely. This is essentially what we’d be doing by emailing to Bernie Schaeffer’s list. In important ways, it’s also what we do with our co-marketing arrangements with Mauldin and did with WAC, USNI, etc.</p><p>If we suddenly increased the free list by 100,000 members, the revenue generated over four months would be $300,000 (at the current average price of about $200, or an increase of $75,000 a month. The list is currently growing at the rate of about 7,442 new additions/month. Over four months this would yield a revenue of 22,326 or $5,581. [Math in the previous sentence isn’t clear.] However, since the growth rate is steady this new revenue would merely replace old revenue. At the current growth rate, the free list campaign is simply standing still. But doubling the free list growth rate would only yield a delta of about $5,000 a month ($11,000 less the dropout of the old cohort). [Again, math isn’t clear to me.]</p><p>Suggest including the top table from the FLists tab of the Dashboard. It shows net adds/losses over time.</p><p>The level of effort involved in doubling the free list growth rate would not be justified by revenue. We don’t know what it would take to increase the growth rate yet. We’re currently doing the SiteTuners deal specifically to address this question. It’s entirely possible that the $25K we’ve committed for them could result in a doubling of our monthly cohort size. Our December cohort is 10,000 people. If 1% buy in 6 weeks at $200, that’s $20K over 6 weeks of campaigns. Doubling that would be $40K in six weeks, and each subsequent month would be an additional $20K delta, a fantastic investment. Only a radical surge in the free list could achieve that. Thus we need either to think of plans for radically improving free list growth and/or increasing the effectiveness of selling to the free list. Especially included in this are considerations of premiums and above all pricing. It may be at pricing is blocking our growth here. </p><p>Absent a major shift, our ability to look at the free list as an engine of growth is limited.</p><p>Ultimately the limiter on Free List is going to be site traffic. I don’t think we’re anywhere close to the upper limit on yield from site traffic to Free List, but that limit will be reached ultimately. At that point, we’re going to approach the upper limit asymptotically. Strategically we need to be thinking in terms of adding chunks of people, via partners or other strategies. </p><p>Paid List</p><p>The paid list consists of members who are already paying Stratfor for membership. They are invited to enter into multi-year agreements or extensions in exchange for discounts and/or premiums. In some campaigns they are invited to give gifts. The point of campaigning to the Paid List is to increase revenue by generating more cash from existing customers. Campaigns to the Paid List are run by a methodology identical to campaigns to the Free List, save that they are not run weekly but at most every other weektwice/month. In some months in the past they were run only once a month or not at all.</p><p>May also want to note that included in Paid sales are campaigns to monthly/quarterly people enticing them to convert to Annual memberships. Paid list sales totaled $762808,000 in 2008 (by mid-December 30). In represented 26% of new, individual sales for the year as a whole and a similar percentage during the second period. It has declined by about $8,000 a month in the second period. The decline in revenue, in spite of increased regularity and frequency of campaigns represents the exhaustion of the pool prepared to buy lifetime subscriptions at $2,000 each. The biggest slug of Lifetimes was the 150+ sold in 2006. By 2007, they weren’t all that big a contributor. The frequency of campaigns has gone down dramatically. During summer 2007, this was all we were selling. By fall 2008, we might hit Paid just once because we were doing well enough in other categories to make our monthly nut and/or because we had some very successful Paid campaigns that hit the line with just one effort. But it also demonstrates a limit on the appetite of members for extended memberships. We’re still maintaining the same percentage of people with multi-year Memberships, 23ish%. The biggest change has been the shift from $597 3-year deals to 2-year for $349 deals. We’ve definitely skimmed the “best” sales prospects. Moreover, sales are increasingly driven by premiums (books) as well as favorable terms, increasing COGS on such sales substantially.</p><p>Paid List sales have been critical in the past for generating operating revenue. While the urgency of that has declined, it remains a significant factor. Therefore continuing Paid List sales remains important. It is noteworthy that members on multi-year subscriptions (beyond 15 months) has remained extremely steady over time, varying between 22 and 24 percent of total members, and currently steady at 23%. The increase in multi-year head count has moved in tandem with increases in total membership. </p><p>This is important since multi-year membership sales are being used to fund current operations. Over time this would result in a massive decline of recurring total revenues unless new single years kept pace. The chart below indicates that we have been successful thus far. 20,000 100%</p><p>18,000 90%</p><p>16,000 80%</p><p>14,000 70%</p><p>12,000 60%</p><p>10,000 50%</p><p>8,000 40%</p><p>6,000 30%</p><p>4,000 20%</p><p>2,000 10%</p><p>0 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Multi-Yr HC 2,806 2,813 2,939 3,019 3,056 3,180 3,277 3,425 3,608 3,743 3,909 4,044 Total HC 12,479 12,691 12,997 13,434 13,692 13,953 14,051 14,845 15,197 16,648 17,157 17,416 Percent 22% 22% 23% 22% 22% 23% 23% 23% 24% 22% 23% 23%</p><p>In one sense, selling multi-year subscriptions is an excellent strategy. Capturing cash now rather than waiting decreases the risk to future revenue and supplies current cash. The latter is also the weakness. Unless fiscal discipline is exercised, and revenues accrued and released over time, the risk of future declines in sales creates the risk of significant cash flow issues. This is particularly so—as has been the case until now—that the revenue from multi- year sales has been used for immediate operating costs. Absolutely right. The key is to use the cash from multi-year sales to invest in capabilities that will more than 1:1 increase total sales.</p><p>It should also be borne in mind that Paid List campaigns combined with premiums are most effective. November and December showed a major surge in Paid List sales, to $109,000 and $114,000. In both months the premium was a copy of my book, while in December, it was also a copy of my book along with gift subscriptions, making COGS on those sales nearly 20%. This means that if we look at Paid List as, in some sense, borrowing money, the cost of the money is at times higher than we might think.</p><p>The gift campaign sold over 400 people (need to run down exact number). That’s $40K in the Paid column but also an addition of over 300 people to the census. We structured the deal so that only after giving 3 gifts could a Member extend his own deal for $99. We certainly had a 20% COGS, but we really weren’t borrowing money with this campaign because we required a corresponding increase in revenue from new people to offset any decrease in the existing Member’s renewal. And of course there’s a non-zero renewal stream that’s been established for the giftees. At this point, eliminating Paid List revenues is not an option and until now has not posed a risk. The problem rests in its use. Pre-selling memberships represents the lowest cost money available to Stratfor. Used as investment with high probability returns, Paid List revenue could be seen as one source of investment capital, about $750,000 a year. Alternatively, the money could be escrowed and released over time. The risk in Paid List is that in using it for operating expenses, we are mortgaging our future against ongoing and uninterrupted growth in individual, annual sales. This is not an irrational strategy, but it carries more risk than escrowing and less upside opportunity than an investment strategy.</p><p>Therefore, this is the one case in which stable to declining sales are, at least for now, a form of discipline. Yep. These are also inherently capped because our census is relatively small and finite. I ordered the bottom chart of the Area Graphic Dashboard tab from most desirable to least desirable sales, starting at the bottom with Walkup and ending with Paid at the top. Paid is the place we have to go rather than choosing to go.</p><p>Walkup Sales</p><p>Walkup sales are those sales made to members who come to our website and purchase directly, rather than responding to a campaign. There could be three sources for these purchasers. First, there are potential free listers or people who received weeklies or campaigns from third parties, who come to the web site directly to buy. All weeklies sent to the Free List have a link for a discounted sale price, so these people probably would use those rather than walking up. Second, there are those who come to the web site via search engines. Third there are those who come to the web site as the result of publicity from the media. Fourth, is the word of mouth from forwarded members-only emails we send out or regular referrals. We do not current have data that would directly explain the traffic.</p><p>It is, however possible to infer some causation. In the first period, the average Walkup sale per month was $43,000. In the second period, the average walkup was $66,000 an increase of $23,000 or 53%. Walk-ups rose during the launch of the new website, which did not receive third party publicity but which was publicized by Stratfor mailings but all these mailings had a much better offer 15- months for $199 than the walkup price of 12-months for $349. We therefore know that this publicity coupled with a propensity of a new web site to increase traffic, did generate sales. However, the sales rate declined after the launch, and sales returned to about $33,000 a month until July when it began to climb. $33,000 a month was roughly the level of sales for Walkups prior to the website launch.</p><p>Suggest including here the New Visitors & Sales tab from the Dashboard which shows sales as well as traffic levels over time. Walkups began to rise in July, 2008 to $49,000. In May 2008, Stratfor switched on its public relations system. It was designed to go into full effect on August 1, but began generating publicity in July, reflected in the rise in revenues. In August, the Georgian War broke out, surging walkup sales to $116,000. However, while the war broke out on August 8, the first week of August already saw a surge of walk-up sales, which we can assume to be tied to an article in Barrons and a mention by Rush Limbaugh. The rest of the month surged on additional publicity triggered by the Red Alert process (a system for energizing sales during a crisis and triggering additional publicity). Some, but not all of the $116,000 was clearly due to publicity, the rest with events linked to publicity and the Red Alert system. It is impossible to disaggregate. Should note that the Red Alerts go to Paid, Free List, and media lists.</p><p>However, September-December sales stabilized at about $60,000 a month, as compared to about $33,000 a month in pre-July months. Thus, while the two periods record a substantial rise in Walkup sales, the actual detailed facts show a somewhat more marked improvement, making Walkup sales the primary systematic driver of growth in the second period and it is reasonable to infer, driven by publicity driving individuals with a propensity to buy to the website. We should note that this is not necessarily a function of traffic. Traffic can remain flat while Walkup sales rise if publicity “cherry picks” customers to the web site with a prior intention to purchase. Again, the graph from the New Visitors tab would illustrate this very nicely.</p><p>The problem now is that Walkup Sales have reached a plateau and with it, the current value of public relations has been realized. It is possible to increase visibility in the press but this becomes increasingly challenging as visibility is already high and there are a limited number of analysts to drive the publicity. Therefore, it is not clear that further systemic growth—outside of periods of intense crisis—are going to drive revenue here. We have a baseline annual sale of about $720,000 that can only improve with other inputs than publicity.</p><p>The vast bulk of our current media placements are quotes from our analysts that appear in mass-market press. We don’t have the same prominence in trade press. And we’ve not yet systematically gone after getting full articles written by Stratfor out in mass or trade press. Both of those could potentially spike walkup business, by going after the “cherry pick” customers you identify above. I think there’s still huge potential here.</p><p>One such input is already under way with a site optimization project, in which an outside consultant is systematically analyzing use patterns on our web site to identify methods that could increase the rate of conversion of visitors. Once that is in place, the problem will be to increase visitors. Remember that the Site Tuners project is oriented exclusively towards getting people onto the Free List. Eric Lawrence’s responsibility is increasing conversions for Walkup sales. Different projects. That said, there’s no question that we can improve our traffic yield and make a substantial difference.</p><p>Strategically Walkup is the “best sales” we have. It’s passive. It’s at sticker price. And once we get the volume up, it should be statistically predictable. Rember we’ve only been doing about 8-10 walkup sales/day. That’s an extremely small number. </p><p>Partnerships</p><p>Essentially, Stratfor has only one partner. We have systematically exploited that partnership, beginning during the second period, as discussed above. The partnership was initiated by Donna Witters, former VP of marketing, in early 2006. It developed into a friendship between myself and John Mauldin, who owns is a financial market guru with an intense following. Mauldin has permitted Aaric to write campaigns to this and another list Mauldin has access to, and has given Aaric relative freedom to campaign as he wishes. The campaigns have been effective within known prameters. [Last sentence isn’t clear]</p><p>The problem is that the relationship is non-replicable as it stands. It relies on personal trust between John and me that translates into free rein for Aaric. Other potential partners would be more cautious and controlling one would assume. At any rate, the most that can be said for this category is that we have an example of an effective partnership but not yet proof of concept. Nor do we have a model for building additional partnerships. Indeed, this particular partnership may be in some jeopardy as Mauldin seeks to monetize his own list for his own ends and is competing with us. Thus far this has had only marginal impact but we need to be cautious about it.</p><p>I’ve been better at selling our stuff to Mauldin’s list than Mauldin has, but it’s entirely possible that another co-marketing partner would be much better at selling our stuff to their list than I am. I’d certainly hope so. A co-marketing arrangement with Motley Fool’s international stock newsletter or with Kiplinger to complement their domestic focus with our international focus could certainly be successful. I see John’s reliance on us to do the selling as a limiting factor rather than an ennabler. I want co-marketing partners that can take our work and know how to “wrap” it effectively. </p><p>Mauldin is our only effective co-marketing partner. We do have other partners that have generated relatively small amounts of money but are valid proofs of concept. ASIS is a licensing arrangement whereby for a flat fee they make a subset of our content available on their website. ICG is a bundling arrangement where all their customers receive a subset of Stratfor content as part of the ICG sale. EBSCO is an aggregator that includes us in one of their institutional databases. Each of these came in over the transom. Got to think that with affirmative effort and a dedicated person, others could be established. Don and I met with drillinginfo.com, and it looks like we’ll do a combination of licensing and/or bundling with them.</p><p>In my initial conversations with Bernie Schaeffer’s rep, she indicated that Bernie would likely be amenable to doing an endorsement mailing very much along the lines we do with Mauldin. Especially if we’re paying for access to the list, we’ll have creative control – subject to not being ridiculous in our claims. </p><p>We should think of partnerships as, in many ways, under construction, with few lessons that could be drawn. Definitely under construction, but I’m comfortable we’ve got quite a few lessons – good and bad – from the last 18 months doing this.</p><p>Conclusion on New Sales</p><p>Individual new sales have increased during the second period by about $78,000. [Per month? Quarter? Needs explanation/reference point] This should translate into an additional $468,000 in 2009 (This increase has been in place for six months in 2008, so only half the annualize increase applies). The situation is more hopeful than that, since new sales have been particularly strong in recent months. Since October, new individual sales have consistently been over $300,000. If that rate continues, new individual sales should equal $3, 600,000 in 2009, as compared to $2,933,000 in 2008, which would be an increase in revenue of $667,000 in 2009.</p><p>There are some issues that have to be addressed. First, there are non- systematic revenues that must be repeated in 2009. For example, the sale to the dormant list generated over $100,000. Other non-systematic sales, sales not derived from on-going processes must be contained in this. Second, there is a growing dependency on premiums as inducements to buy or extend memberships. That increases COGS and requires increased revenue to substitute for it. </p><p>The greatest problem is increasing systematic sales so that substantially more than $667,000 can be achieved. It is not clear that additional growth follows logically from existing methods. At the very least, a quantum leap in revenues using current methods is unlikely. Therefore the analysis of the current condition of new individual sales drives home a single fact: new systematic methodologies have to be introduced to generate massive increases. Sales processes in 2009 cannot simply replicate processes in 2008 if further growth is expected. I’d draw a distinction here between processes per se and people to execute the processes. For example, while it’s not certain, it’s certainly logical that an outbound effort to expand Partnership revenue would be more successful than solely relying on inbound requests. Same for PR. Same for site optimization. Etc. There’s little question in my mind that we can increase the dashboard by devoting people, cash, IT resources, etc. towards enhancing performance in each of the revenue lines.</p><p>No question that if all our inputs stay the same, we’re likely to have very similar outputs. We definitely need to get more capability around what we do.</p><p>Without a definition, though, of what’s strategically meaningful, above and beyond replacing declining CIS revenues, it’s difficult to evaluate a “good” or “bad” strategy. We need a target we’re trying to hit.</p><p>Individual Renewals and Recharges </p><p>Individual renewals are the largest and most predictable revenue source for Stratfor publishing. Stratfor sells individual subscriptions via credit card. When a sale is made, the credit card information is retained. The following year, or whenever the membership period is completed, the card is charged again. If the first purchase was at a discount, the charge is made at a higher price. The card is charged two months before expiration. This used to be forced by exigency, the need to generate cash early. It has remained in place because it appears to be the most efficient way to execute renewals. Prior to charging, individuals are informed that they would be charged, and have an opportunity to opt out. After charges are made, individuals can ask for and receive refunds. However, the three person Customer Service team, managed by John Gibbons, works to retain those who drop. In addition, the team works to renew people whose credit cards have expired. </p><p>As a result of this system, Stratfor renews approximately 70 percent of subscribers by number, and 80 percent by dollar amount, because of upsell. This makes for extraordinary predictability in revenue. In 2008, Stratfor’s individual renewal revenue was about $1,660,000. 2009 revenue is currently projected at $2,062,000. However this amount is understated. Since Stratfor renews two months in advance, annual subscribers who will be renewed in October, November and December, 2009, will not be signing up for their initial membership until December, January and February of 2009. It would be conservative to increase expected renewals in 2009 by an additional $360,000 (80% of $150,000 a month for three months). That would make 2009 individual renewal revenues $2,422,000, an increase of $762,000 over 2008. But remember that the currently forecast 2009 renewal number will actually decline as successful Paid campaigns shrink the total pool available for renewal during 2009. The individual renewal system is the most developed and robust revenue system in the company. The recharge system is the least well developed. </p><p>Members Walkup sales and some Free List campaigns offer are given the option of paying monthly, quarterly or bi-annual payment modalitiesly. The initial charge is categorized as either Walkup or Free List sales. The second and subsequent charges are Ccalled “recharges,” they have grown substantially on percentage basis—45% between the two periods—but relatively little on an absolute basis, only $11,000 a month on average in the second period. The problem we have with this is embedded in our database. We cannot extract at this time how long individuals remain with us. We don’t know if a monthly payee at $19.95 a month is paying on average $240 a year or dropping out after two payments. Intuitively it would seem that recharges are growing, but we do not know how fast or how viably.</p><p>This will have to be answered in two contexts. One is upgrading our database. The second is developing a pricing strategy that analyzes recharges in the context of a broader vision.</p><p>Conclusion: Stratfor’s Individual Sales</p><p>Stratfor’s combined individual sales (new and renewal) for 2008 was $4,835,000. Page 3 of Darryls 12/26 Weekly Business Report shows YTD 2008 Individual (net of refunds) at $4.524MM A reasonable forecast for increased sales next year would be $1,429,000, [doing nothing additional beyond what we’re currently doing?] bringing sales in 2009 to $6,264,000, an increase of 29%. In the face of the CIS/GV issue this is insufficient, but it does serve as a foundation for solving the problem. </p>