Austin-based Stratfor Attempts to Make Smart Money on Global Intelligence
On November 22, 1999, an Austin company called Stratfor sent a bold e-mail to 15,000 recipients around the globe. Its subject line: “Philippine President’s Days Are Numbered.” In the brisk prose that has become its trademark, Stratfor’s evaluation of the political situation in Manila contained bad news for the fortunes of actor-turned politician Joseph Estrada. “Whether removed by force or by the broad coalition arrayed against him,” the message concluded, “Estrada is unlikely to fulfill his six-year term in office.” The forecast was part of a “Global Intelligence Update” (or GIU) that Stratfor produced daily and sent to its registered subscribers for free.
In Manila, the forecast was used by anti-Estrada forces to mobilize popular opposition. Meanwhile, Estrada supporters dismissed the Stratfor analysis as mere Internet dross, unattributed and unsourced. Most dangerously, they said, no one had paid for it. “It’s like the crank predictions about the end of the world, which we read from time to time,” Senator Francisco Tatad told the Manila Standard. “It is rubbish, pure and simple.”
Stratfor — the company’s name is a contraction of “Strategic Forecasting” — was doing for the Philippines what it does for every region of the world: vacuuming up all far-flung bits of information from Internet sources, analyzing them, then illuminating the global balance of power in forecasts that it sells as business and military intelligence.
Yet the company itself was struggling — and appears to have just staggered again. Despite its own rosy financial forecasts only a few weeks ago, last week Stratfor closed its recently opened Washington, D.C. office and reorganized its Austin staff (see “Stratfor Staggers?” p.26). Six people (of roughly 35 full-time staff) will lose their jobs or be offered other positions in the company.
Stratfor president and CEO Don Kuykendall called the moves “a reallocation of dollars that will help us develop products” for several new corporate customers, though Stratfor’s founder, George Friedman, cited some tensions that have long challenged the company: journalists vs. analysts; Washington, D.C., vs. Austin; Web content vs. consulting. Every business has inherent contradictions, Friedman argues, and you succeed if you can manage them. “The fact that there’s a tension represents a vibrancy,” Friedman says. “It doesn’t mean that the organization has failed to define itself.”
While company spokespeople describe these changes simply as part of Stratfor’s ongoing evolution, the balancing act demonstrates how hard it is to make the World Wide Web an actual source of profit for mainstream businesses.
A Toll Booth on the Information Superhighway?
As an “open source intelligence provider,” Stratfor could exploit unclassified Internet information better than even the Central Intelligence Agency (which was undergoing its own post-Cold War identity crisis). But was it a consulting business? A publishing company? Another Web content provider? In the multibillion-dollar business intelligence market, would it succeed? The answers weren’t clear. Its Web site, www.stratfor.com, was always a media favorite, but visits were falling off. There was no business plan. A December payroll was missed.
The Philippine stock market was cowering — two weeks after Stratfor published its forecast, the market lost 2% of its value, a 30-point drop worth $90 million; given that the stock market trades only 30 companies, it was a significant drop. Yet at the same time, Stratfor itself was running out of funds, its seed money exhausted.
Nearly two years later, President Estrada is gone — ousted in a January 2001 popular uprising. Stratfor, however, is still here. Long after the glow of the NASDAQ meltdown has subsided, Stratfor retains the sexy glint of money. (Yes, they were right on Estrada — more on that below.) According to CEO Don Kuykendall, a few weeks ago the company was about to turn profitable for the first time, with gross revenues between $2.5 million and $3 million. Was that a prediction, a certain future foretold (something Stratfor says it doesn’t do)? Or was it a forecast, which tells a particular future’s likelihood? “It’s both,” Kuykendall told the Chronicle. “It’s based on identified business coming in and business going out.”
Stratfor says it counts 27,332 subscribers, about 10,000 of which are individuals, the rest corporate subscribers. A $50 annual subscription, eventually rising to $80, buys individual access to the entire site, and it’ll cost business customers upwards of $1,000 for five users. This means revenues stand at about $3 million annually. Two-thirds of subscribers are from the U.S., and the Web site receives visitors from 134 countries (including Greenland, Australia, Rwanda, and the Vatican). Thirty or so people inhabit half a floor of the Chase building at Lavaca and Fifth Street; in 2000, the company opened a D.C. office, with five more employees (now laid off). There’s even been a software spin-off company — Infraworks — also based in Austin, that’s developed and launched digital security software, such as a virtual “shredder” for deleted computer files and an application for sending self-destructing e-mail. (Infraworks is said to be unaffected by the latest changes.)
Stratfor’s influence is truly global — this cartoon regarding the company’s predictions about Philippine President Joseph Estrada ran in the Dec. 3, 1999 edition of the Philippine Daily Inquirer.
It was tempting to look at Stratfor’s declared success as the potential future of content delivery on the Web — until last week, when the balancing act between Web content and consulting apparently slipped.
Like other Web portals (Salon, Britannica.com, theStreet.com, Inside.com), Stratfor recently switched to a paid-subscription model. Since early August, visitors must buy Stratfor’s forecasts, even their formerly free GIUs. But other than that the porn industry has made millions from it, no one knows much about the online subscription model — whether consumers will pay for Web entertainment and opinion, it’s still hard to say. The subscription model might work. It might also be an exquisite form of autoerotic strangulation.
But Stratfor doesn’t produce opinion or entertainment, which makes it less like Salon than Congressional Quarterly or the National Journal (two subscription-based publications from Washington, D.C.). What Stratfor produces is the information economy’s equivalent of guns: knowledge about the world that can change the world, quickly and irrevocably. Information doesn’t want to be free; information wants to be dangerous. So if Stratfor succeeds, it’s because more individuals and corporations want access to information that helps them dissect an unstable world — and are willing to pay steady bucks for it. At the same time, this is information that’s accountable to no one — and as Stratfor’s forecasts about the Philippines demonstrated, that’s what makes information dangerous.
Analysts, Guns, and Money
“Stratfor does not normally talk about itself,” read the GIU in early December of 1999, as controversy in the Philippines raged. “We are constantly deluged with e-mail demanding to know who we are, who funds us. … We usually ignore these demands. Normally, Stratfor doesn’t talk about Stratfor; this week, we will.”
This GIU was broadcast, as all Stratfor products are, without a byline, but everyone knew who wrote it. Employees maintain that no product belongs to any one person, because it’s been hammered out among analysts and editors. (And as chief analyst Matt Baker admits: “You can tell a lot about a company by finding out who works there.”) But in this case, the person taking a stab at Stratfor’s own existence was probably the only person who could. The author was Stratfor’s founder, George Friedman, a former professor at Dickinson College in Pennsylvania and a highly regarded intelligence analyst (a recent New York Times Magazine story on space war quoted him several times). In 1995, he founded Stratfor’s prior incarnation — the Center for Geopolitical Studies — at Louisiana State University, in order to marry objective foreign policy analysis with advanced technologies (an early funder was Sun Microsystems). “Foreign policy had turned into a Crossfire kind of thing,” Friedman says. “But there aren’t only two points of view, and you don’t need to shout.” In 1996, after LSU administrators failed to grasp why the Center for Geopolitical Studies mattered, Friedman left for the private sector, pooled what Center funds remained, put in money of his own, and started an intelligence consulting firm called Stratfor. (“I’m going to write a novel called Start Up,” Friedman says. “Nowhere else do you see the human condition, except perhaps in war.”) In the summer of 1997, Friedman and his team came from Louisiana to a place with an intelligent population, even if it’s not known as an intelligence town. Austin did have a pool of bright young people, a large research library at a major university, and a significant tech presence.
The original idea was to build a brand name as a smart private intelligence firm by disseminating free GIU forecasts — attracting corporate clients who need to know how the calculus of power in Azerbaijan is going to shake out in the next two quarters, whether Euro futures are rising, or what butterflies in the Marañon are up to. The company’s profile rose when it correctly forecast the Asian economic crisis in 1996, and again during the Kosovo conflict in 1999, when Stratfor set up a real-time intelligence center that was scooping CNN and more entrenched intelligence agencies. Part of Stratfor’s advantage was having GIU subscribers on the ground in Kosovo sending reliable e-mail reports back to Austin. “It would have cost the CIA a fortune to put somebody on the ground in Kosovo in the middle of a war,” Friedman says. “But a Hotmail account costs nothing.” (To maintain this resource of discount eyeballs on the ground, Stratfor still provides a free intelligence briefing, even after discontinuing the free GIU in August — which at its most popular went to over 100,000 people.)
What most caught people’s eyes was Stratfor’s style. Its positions were often contrarian, and it persisted in supporting them with evidence. It also persisted in being correct. The analyses didn’t always list their sources, but that didn’t matter. “Journalism has trouble following foreign policy,” Friedman muses, “because they want everything to be sourced. Like in China — where you can’t get a picture of what’s going on there, because you don’t have access to the other side.” But in the best tradition of Kremlin-watching, Stratfor spun inferences from afar; unlike old-school Kremlin watchers, Stratfor had better data via the Internet. Also distinctive was Stratfor’s dispassion. On any ideological chart the analysts flatlined, and their prose was crisp, free of jargon. “No one knows what side we’re on,” Friedman says. “In Belgrade they think we’re working for the CIA, and in Washington they thought we were getting paid by the Serbians. When [Nation columnist] Alexander Cockburn praised the same article that Rush Limbaugh did, I knew: we were in.”
The Art of Being Surprised
Before it goes out into the world, Stratfor’s global intelligence begins as caffeinated morning conversations.
On a recent Thursday morning, 10 Stratfor analysts gathered in a conference room to hash out forecasts and make editorial plans. (Another analyst, Latin American expert Jack Sweeney, was patched in via phone from D.C.)
At the head of the table sits Victor Gobayev, the director of intelligence management, a retired Soviet military intelligence officer. A slight red-haired man with a surgeon’s smooth hands, he’ll talk about the many places his missions have brought him — just don’t expect him to relate what those missions entailed. Gobayev lets his analysts lightly tease him, because “we have to have an enjoyable atmosphere,” and he lets the seven men and three women pounce on each other’s ideas about Palestine, cyber warfare, and East Timor. Over the next hour, the meeting combines the head-knocking intensity of a graduate seminar, the speed of an editorial meeting, and the emotional distance of a game of Stratego or Risk. Often they’re fiery. “That’s why we put in red carpet,” joked Kuykendall, “To hide the bloodstains.”
“My piece is an attempt to get away from the euphemism, ‘cyber war,'” says Matt Baker, the boy-faced chief analyst who is a former student of Friedman. “Are you talking about Arnold Schwarzenegger with a metal head, or are you talking about three nerds in the back room?”
“Be careful with that last sentence, because there are many systems that control everything,” fires back Peter Zeihan, a thin man with a black goatee. For a moment, the two tussle:
“That’s to be determined,” Baker retorts.
Chief Analyst Matt Baker
Photo By Jana Birchum
“There’s a federal task force that’s been working on this for the last six years,” Zeihan says.
“But the systems aren’t as accessible as you’re assuming.”
“Wells Fargo and Chase had a good portion of their operations cut down by hacker attacks, and that’s people with little resources.”
“Put it this way,” Baker says, brushing aside Peter’s information. “In cyber war, you need a different bullet for every soldier on the battlefield, to bring down each system. That’s why a nation is different from an individual launching a harassing attack — so cyber war falls out of the realm of cyber terrorism.”
Despite their general smarts, their Web savvy, and their multilingualism (in the room are speakers of Russian, Hungarian, Korean, Hebrew, French, Spanish, Mandarin, and Arabic), the 10 analysts make unlikely spies. Except for Gobayev, they’re all under the age of 35. None have served in the military or worked in the government. Their direct experiences of foreign places seem to be mostly of the junior-year-abroad type. On the other hand, their youth makes them adaptable, more easily plugged into Stratfor’s “proprietary methodology.” (This plugging they actually call “being Stratfored.”)
Most of the methodology simply involves rigorous thinking, but some of it involves “the art of being surprised,” as George Friedman calls it. “If you lose that art, you’ve lost everything.” Richard Parker, the executive editor and chief operating officer (and himself 37), points out another advantage of the twenty- and thirty-something analysts: As members of the post-Vietnam, post-Watergate, post-Cold War generation, they “hold little in the way of ideology.” So — the Stratfor argument goes — they see the world with clearer eyes. (They’re also much cheaper by the pound than seasoned professionals, as employees at the Washington bureau last week found out.)
During Baker and Zeihan’s exchange on cyber war, the youngest member of the team huddles in a fleece jacket. Meredith Doherty, who is 23, doesn’t say much this morning — the conversation hasn’t turned to her region of specialty, Asia. The GIU about Joseph Estrada’s presidency didn’t have a byline either, but everyone in the office knows it was her call. So when she does talk, people are inclined to listen.
At the time of the Estrada GIU, Doherty was still a senior at UT-Austin, hired at Stratfor the previous August. In November, her supervisor assigned her to investigate the likelihood of a coup in the Phillipines. Doherty, who was studying Government and French, did “intense” research with open-source materials: all of the English newspapers coming out of the country and any bios of Estrada. After two weeks, she knew who owned the Philippine newspapers and their ties, if any, to the president. She knew the status of court cases involving his friends. She knew his daily schedule. “I know how to sort to the truth,” she says. Importantly, she knew a crucial piece of cultural information: that if Archbishop Jamie Sin publicly criticized Estrada, then the people of a strongly Catholic country were likely to follow. “It was obvious that he wasn’t willing to behave the way he should if he wanted to stay in office,” Doherty says. “So I decided there’s no way he’s going to finish his term.”
Scholars or Mercenaries?
Journalists have a hard time reporting on Stratfor for the same reason they have difficulty reporting on foreign policy. As Richard Parker puts it: “If you know about Kathmandu but don’t have a context for that knowledge, then it’s relatively useless.” Most media stories about Stratfor treat the company like a Kathmandu, preferring to bask in the company’s aura of espionage, throwing in a colorful quote from Friedman. (Explaining why it’s better to be in Austin rather than an “intelligence town” like Washington: “We don’t go to cocktail parties.”) As a result, virtually the only analysis of Stratfor’s influence on the world was the one done by Friedman himself.
“We view ourselves as outside, disinterested observers,” Friedman wrote in his GIU about Stratfor, which disavowed any responsibility for what was then happening in the Philippines. Developing countries were used to being “ignored or manipulated, but not observed,” Friedman wrote, and what the Internet has made possible is that “Stratfor, without a crisis or an interest at stake, made a forecast” that was important in the country but ignored elsewhere.
But Stratfor did have a stake in the Philippine outcome: its own business imperative, which is to be right. (In a phone interview, Friedman put it more subtly: “We’re not trying to be infallible, but we’re trying to load the deck, in order to improve the probabilities of correctness.”) Successful forecasts give them credibility, which sells more subscriptions. “The problem with any forward-looking analysis,” Parker says, “is that you don’t only go out on a limb, but you have to define a narrow limb.”
Does Doherty think her limb was narrow enough? After all, Estrada’s term was up in 2004, which gave her forecast a large window. “I didn’t know how the coup would happen, or when,” she says. She never had a more specific claim that her colleagues urged her to back off from, in the pursuit of being right. “If we know when something’s going to happen, we say.”
Retired Soviet military intelligence officer Victor Gobayev
Photo By Jana Birchum
Then and now, Stratfor’s status depends on its ability to capture a piece of the business intelligence marketplace, estimated between $12 and $70 billion. Robert Steele, the president of Open Source Solutions, once estimated that the market for raw information, including commercial imagery, is worth $10 billion; data conversion, storage, visualization, and desktop-access tools are worth $20 billion; and “value-added processing and human services” like Stratfor’s are theoretically worth $30 billion.
A former member of the intelligence establishment, Steele dismisses Stratfor’s products as “a random, unordered series of unsourced opinions.” Steele, who made a name for OSS.net several years ago by winning a competition to see who could use open sources to collect the most information about the nation of Burundi, says of Stratfor: “They’re puppies.” (Responds Friedman: “He tried our model, and it failed. I’m sorry if that’s created some professional animosity.”)
Stratfor executives actually count as their main competition two British firms, The Economist’s Intelligence Unit (which relies upon 750 economists, consultants, journalists, and editors from more than 195 countries) and Oxford Analytica, founded in 1975. Like Stratfor, those companies produce custom intelligence for corporations using experienced analysts. Unlike Stratfor, they rely on networks of for-hire experts whose time is expensive. As Stratfor executives like to point out, those products are more expensive, starting in the thousands of dollars for each one, while a membership to Stratfor’s entire site currently costs $50.
Stratfor provides intelligence for “people who don’t know any better,” Steele says, but for Stratfor that’s not a bad thing. That’s why Stratfor’s clients sign up. The democratization of information is really the search for a larger market for that information, and Stratfor still believes it has found one among businesspeople who need detailed, reliable information about specific regions of the world. According to an analysis by Earle Palmer Brown, a PR and marketing company, 26% of Stratfor’s readers are executives, 21% are managers who want to know, “Do we send the engineers to Colombia this month or wait until next year? Do we okay the credit to Indonesian shippers, or not?” (The information not only gives them an edge on the business competition but also on the smart, young kid down the hall.)
Other demographics are equally revealing. Stratfor readers are mostly male (86%), educated (47% have a graduate degree), American, and earn over $50,000 a year. In the U.S., there are eight million individuals who fit this profile. “For the EIU and Oxford Analytica, the idea of producing a low-cost product to 9,000 individuals would be anathema,” Parker says. For Stratfor, that’s the market. “There are people in this country who are dealing with the effects of globalization, from businesses to mom and pop shops, and all they know is, this is a thing they need to understand.” The question remains: Will enough of those folks pay enough for that understanding to sustain the company?
Opponents of globalization should look more closely at companies like Stratfor, because if more and more businesspeople are willing to spend money mapping the paths their investments will take, the same businesspeople have no illusions that globalization — read “global economic integration” — will bring peace, prosperity, and brotherhood. They’re not likely to chuck bricks at Seattle cops, but they are directly concerned with how globalization occurs. In that sense, Stratfor — if it survives — might not be a bad thing. As Steele points out, in 2000, there were 26 wars that killed more than 1,000 people, 78 persistent conflicts between nations, and 178 violent internal struggles, all of which supports a central assumption underpinning Stratfor’s view that the world is an unstable place. “The way the world has been for 2,000 years is the way it will be for the next hundred,” Friedman says. “We provide the tools for wending your way through this world.”
“What we’re able to do is provide value to people who aren’t in the Philippines who wouldn’t have noticed the situation at all,” says Richard Parker. “Can we actually change the global situation? I don’t think we can. What did we change in the Philippines? Nothing. The processes were under way, and we said what would or would not happen.”
On the other hand, Stratfor isn’t accountable to anyone — except its clients. Thomas Adams, writing in Parameters, the U.S. Army War College Quarterly, discussed the dangers that actual mercenaries and “information warriors” like Stratfor may pose. Nations have always hired soldiers to fight their wars, and they have frequently hired experts to train their soldiers. A third type of mercenary is emerging, Adams writes, in the form of private companies that provide highly specialized information services (such as actual and virtual surveillance) that can be bought by military or civilian concerns.
“From the point of view of the nation-state,” Adams writes, “military corporations are dangerous for a far more fundamental reason: They generate military power that does not reside in the state itself.”
If Stratfor is indeed able to turn itself around financially, it will be evidence of just how many corporations and individuals want the power that dangerous information provides. Stratfor’s attempt at recovery is employing several catalysts. For one thing, the company acquired a business staff, among them Don Kuykendall, a former banker and owner of several radio stations (among them KVET), who now acts as president and CEO.
Also transforming was a yearlong gig to provide content for the external and internal Web sites of American International Group, a Fortune 500 insurance and financial services company. A major engagement, it wasn’t the standard “one-off” consulting job, where a client buys a product then leaves the consultant to hope they buy another. When Stratfor’s new business staff realized that they could sell their products more than once, a new business model was born. But last week’s reorganization came on the heels of news that corporate sales are down — what else might the company have to do to save itself, if that’s possible?
Last summer Stratfor got a consulting gig to study the international computing business — information that’s now part of Stratfor’s inventory of intelligence. “If we get asked a question, we first query ourselves, to see what we already have,” Parker says. “You don’t have to reinvent the wheel every time.”
This model is designed to make money. “It’s not a fancy Internet business model,” says Parker. “You charge people for the information. That’s it.” But as Parker learned the hardest way last week, if not enough people are buying what you’re selling, all the knowledge in the world can’t save you. end story