From the outside, Substack’s strategy has seemed to be the following: 1) Create a beautiful, simple blogging platform, which Substack most certainly is. 2) Very slowly release control of who can use Substack to create cachet. 3) Pay some people to post to the site, but not most of them. (Sub-strategy: Don’t disclose who’s working for Substack and who’s working on Substack.) 4) Promote the people they’ve paid along with a very small subset of everyone else.
This is a true paragraph. But it wasn’t actually written about Substack. It was originally written in a 2013 article about Medium, a then brand-new blogging platform.
In the past few weeks, Substack has continued to push their way to the top of the headlines. They’ve attracted journalists such as Casey Newton (The Verge), Matt Taibbi (Rolling Stone) and Andrew Sullivan (New York Magazine) to join them and there’s a lot of buzz around the platform. I’m even writing on Substack. In July of 2019, Substack raised a $15.3 million Series A that was led by Andreessen Horowitz. And that’s when the questions began. Could a media company justify such a lofty valuation? Is Substack even a media company? What would they do with the cash?
It’s now becoming clear where the money is going: to entice writers to join the platform. According to the New York Times, Anne Helen Peterson who writes the newsletter Culture Study was given a large amount upfront to join the platform. In return, she makes 15% of the subscription revenue the first year, after which it likely returns to the standard fee (90% revenue to the writer, 10% to Substack). Popular blogger Scott Alexander also revealed through a blog post that Substack had approached him with an “extremely generous offer.”
But Substack’s plan mirrors another company, one that isn’t discussed as much these days. Medium was founded in 2013 by Twitter co-founder Ev Williams and while Medium has experimented with different monetization methods (to say it politely), they share similarities with Substack. Both platforms try to convince writers and independent media brands to join them. Both platforms have lots of funding and receive lots of press. Neither platform can decide if they are a content management system or a media brand.
And while Substack has grown their paid subscriber base by 250% over the past three months, there’s a case to be made that they are closer to Medium than not. Let’s get into it.
The Perception of Substack
These days, Substack has a glowing perception among industry insiders. It’s viewed as the savior of Journalism and an antidote to the click-baity, ad-supported open internet.
It especially appeals to a demographic that spends a lot of time on text-based social media like Twitter and Reddit. It’s easy to accidentally lose hours of your day sneaking down rabbit holes and proverbially watching car accidents happen between the accounts that you follow. The promise of a direct relationship with a creator or media company is appealing. Somewhere that is more intimate and hidden away from comments left by troll accounts. Email provides this space.
In addition, Twitter is often used as a way for readers to find and support Substack writers. There’s a mutually beneficial relationship between the platforms, further enhanced by Substack’s recently shipped feature that allows readers to find which of the people they follow on Twitter write on Substack.
What would be the path for Substack to work?
To start off, let’s figure out how big Substack has to be in order to please their investors, and how close they are to that goal. In July, Substack had 100k paying subscribers. Just this week, Axios reported that they had 250k paying subscribers — a 2.5x increase in a couple months. The top 10 publishers bring in $7 million annually between them, which means that the top couple (The Dispatch, Letters from an American) are likely making over seven figures annually.
But how much is Substack pulling in themselves?
To get an estimate of their revenue, we need to know how much each of their subscribers bring in. The minimum monthly subscription that Substack allows is $5 per month. Some of their publications charge as high as $49, but most are between $5 and $10. Let’s assume the average subscription costs $8 per month.
They have 250k subscribers, but there are likely some people who subscribe to multiple publications. Let’s say there are 275k active subscriptions from those 250k subscribers. At $8 per month, that’s $2.2 million in monthly gross revenue. Substack takes 10% of that as their fee, so that would leave about $220k in monthly revenue for Substack. Multiplied by 12 months and Substack probably has about $2.64 million in annualized revenue.
In order to achieve a venture-scale outcome, they would need a $1 billion valuation. If we assume a 10x revenue multiple, they need $100 million in revenue. $2.64 million is a good start, but far from reaching their expectations.
How Substack Could Work
In the fall of 2019, I received a Twitter direct message from Hamish McKenzie asking to meet up to discuss joining Substack as a writer. At the time, I was just writing for fun. I had no intention of turning it into a job. But the meeting gave me a chance to hear a bit more about what they were working on (and it turns out I did end up using Substack as a full-time writer…).
At the time, my thesis was that the way for Substack to grow into their lofty valuation was to provide discovery for writers. If they could build a new place for people to spend time — and offer recommendations along the way — then they would be onto something. Note that this wouldn’t only help drive discovery, but also build a network effect. From my November 2019 post:
If Substack can get enough writers and subscribers on their platform, it starts to look like a high-quality, ad-free version of Facebook Groups or Reddit. The real power comes when a platform combines these communities. While some of us are a part of one-off communities now, if they were all integrated in the same interface, it could become our default online third space. With enough topics and a high enough quality of community, Substack could create a habit to come back over and over again.
Network value is derived on the user side by aggregating niche topic interests and connecting readers with each other across platforms. On Twitter, for example, it’s difficult to display the breadth and depth of interests to someone that comes across your profile. By having a profile that shows which communities you pay for and how active you are in them, there is a higher chance of creating connections with other readers.
At first it seems ridiculous that people would not only switch attention from modern social networks like Facebook and Twitter, let alone pay for it. But the catalyst could be when the highest quality writers and dedicated niche communities (that can’t exist on the ad-supported internet or choose to write in private) are only available on Substack, it becomes much more compelling.
Substack also seems to understand something that few other technology platforms have understood: that the atomic unit of media isn’t an article, nor a media brand, but instead is the creator themselves.
This is something that Medium never seemed to understand. From Co-founder Ev Williams’ first piece announcing Medium in 2013:
Medium is a new place on the Internet where people share ideas and stories that are longer than 140 characters and not just for friends. It’s designed for little stories that make your day better and manifestos that change the world. It’s used by everyone from professional journalists to amateur cooks. It’s simple, beautiful, collaborative, and it helps you find the right audience for whatever you have to say.
Through a combination of algorithmic and editorial curation, posts on Medium get spread around based on interest and engagement. Some get hundreds of thousands of readers — and not because they were written by famous people. Medium is not about who you are or whom you know, but about what you have to say.
This thesis — which Medium kept its promise on throughout several product changes — is the reason that they never quite felt right. The idea that we want to consume content without knowing the creator isn’t quite right. Rather, the content is just a proxy for access to a person, brand or emotion.
Medium then moved to Collections: groups of similar articles curated by their editors. If you, as a writer, were selected to be put in a Collection, your piece was put in front of thousands of readers. If not, it wasn’t always easy to find.
Keep in mind that Medium didn’t monetize in any way for quite some time. When you are backed by a billionaire with deep pockets and a strong mission, making money isn’t always the only priority.
However, this rosy picture of a creator-first platform is one of the only reasons Substack diverges from Medium. Perhaps it’s the only thing that matters, but perhaps not.
Why Substack Could End Up Like Medium
The big question for Substack is their fee structure. They are the easiest way to set up a paid newsletter, no question. Their text editor is clean. They auto publish in email and on the web. They make it easy to accept payments.
However, the big question is their cost structure. For each publication, they take 10% of the subscription revenue. At the beginning of a publication’s life, this is reasonable. Maybe even a steal. But once a writer builds a business that makes hundreds of thousands of dollars a year, what’s stopping them from moving to another platform like Ghost or building their own tech in-house to save money?
This happened with Medium too. Publications that were built on Medium had better or cheaper ways to reach their audience. Medium helped with initial distribution, but once media brands wanted to own a larger share of their revenue or monetize in different ways, it didn’t make sense to stick around on the platform.
Notable Medium publications (and dates on Medium):
The Ringer: June 2016 to May 2017
Backchannel: 2014 to June 2017
Hackernoon: January 2016 to March 2019
Notable Substack publications (and dates on Substack):
Now, there’s a good chance that Substack creates a good enough experience for writers that they stick with the 10%. And a big part of “good enough” could be the social standing that comes with writing on Substack. The more quality writing that lives on Substack, the better the brand becomes.
But even with this rapid growth and attraction of headline writers, Substack has a long way to go to become a successful business.
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