Substack: Raising Up Newsletters to Business Relevance

Notes from a Christian Humanist. Summaries of new patents from big tech companies. An exploration of the best animations in the world. A history of monopoly power. In-depth fantasy football analysis. Writings from the world’s most famous whistleblower. Can you spot the common thread?

While these writings appeal to vastly different audiences, they share one important similarity: they’re all created on Substack. Founded in 2017, Substack is based on the idea: “what if we just made a dead-simple way for a writer to go independent?” (source). Simply put, Substack is changing the way that writers do business.

The Substack Business Model

Substack provides the core digital infrastructure for writers to spin-up a newsletter-based business. This includes providing a website for articles, tools for managing email lists, and a payments system that handles user subscriptions. Independent writers create newsletters, choose the parameters of their business: how much to charge (including the ability to make their newsletter free), how often to post, what content to make freely available, and how to market their materials. Users subscribe to each newsletter independently, and primarily interact with the service directly through their email inbox. Substack makes money by charging a flat 10% royalty from all newsletter revenue.

While it may sound simple, Substack’s revenue model has been revolutionary for writers because of the way it changes their incentives. In the traditional media structure, institutions employ writers and server reader through shared infrastructure and branding (think CNN, NYTimes, or the Wired Magazine). With Substack, the tables are flipped: writers are tasked with creating their own brand and directly accrue the benefits success (think Ben Thompson’s Stratechery newsletter). Writers are therefore incentivized to provide continued value to their readers, rather than write flashy headlines that draw shallow clicks.

Substack is profoundly in the spirit of the founders of the internet — a way of digitally connecting like-minded folks. The models when it can empower the long-tail of content producers who are not powerful enough in their own right to fund their own business operations (source). Whereas traditionally such niche writers would not be able to attract an audience and capture value at scale, Substack dramatically lowers the entry cost of starting a new venture is now possible.

It works — brand name writers have left their jobs to join Substack (source), and new diverse content has abounded (source). As a result, Substack’s user base has grown exponentially in the past years (see Figure 2).

Platform Woes: Competition and Disintermediation

However, in order to make this model work, Substack surrenders its ability to generate strong network effects that are traditionally associated with digital platforms. Because users do not usually go to the Substack website, there is limited ability to recommend other articles. Furthermore, users only benefit from the following of the newsletter they follow, rather than the user-base of the Substack platform overall. Similarly, writers do not benefit from the presence of other writers because of Substack’s limited ability to cross-sell or bundling articles or newsletters. (Indeed, a group of writers left Substack in 2020 to form every.to precisely to try to capture economic benefits from bundling (source)). Substack’s writer-size network effects are thus limited to the way attracting more and better writers confers legitimacy on the platform.

As a result, Substack suffers from many competitive issues. Whereas Substack made a name by providing a more attractive alternative than Medium, other imitative models like Ghost and Squarespace have entered. Indeed, even Twitter has created a possible competitive model (source). Similarly, Substack does not have a way of preventing successful writers from leaving and taking their audience (examples). In fact, the business model almost encourages this disintermediation: without strong network effects, the only thing keeping writers on Substack is switching costs. And the relative switching costs go down as newsletters volume increases.

In closing, Substack has succeeded thus far by lowering the cost of entry for independent writers. This creates value by aligning writer incentives with delivering quality, and empowering writers who might not have written otherwise. Their growth has been powered by a first-mover advantage. However, while the value created is obvious and large, I’m not optimistic about Substack’s sustainability as a business. Economic logic predicts that the lack of networks effects will make it hard to create a competitive barrier that will keep both writers happy and on the platform.

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