Substack: Raising Up Newsletters to Business Relevance

This newsletter disrupter has grown exponentially in the past few years. Read on to learn how, and whether this growth will last.

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.

Figure 1 – Substack’s business model, illustrated. Source: Kevin LaBuz

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).

Figure 2 – Substack Subscribers over time. Source: Backlinko

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 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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Student comments on Substack: Raising Up Newsletters to Business Relevance

  1. Really interesting post, Daniel – thanks for sharing. I’ve subscribed to Substack blogs in the past and have found a ton of value in the platform.

    The example is fascinating to me – it’s striking that these writers are now forming a new version of traditional media (WSJ/NYT/etc.)…which is exactly what they left to join Substack. I think your points on the inherent drawbacks of the platform are really interesting and make sense – Substack could likely create stronger network effects through recommendations, visibility on other blogs, etc. That said, the exponential growth in paid subscribers suggests they are doing something right!

  2. Great to read! You indicated that to make thier model work, substack gives up tradtional network-effects. You’ve also indicated how other platforms are taking advantage of this fact. Given thier brand and their mission, how do you think substack will respond?

  3. Hello Daniel! Thank you for this post. I agree with your concerns about Substack’s sustainability. I also believe that the lack of a network effect is particularly harmful to those newcomers without a large following. If you don’t have a following, Substack won’t help you grow one. On the other hand, Medium’s contents have the potential to get distributed widely among the community because users can easily read recommendations. Do you think Substack can adopt a similar model?

  4. Nice touch at the end there Daniel! I wonder if Substack could take a page out of Pocket’s handbook and surface article recommendations or partner with Pocket to show other recommended Substack blogs. I wonder if they might take a page out of the Threadless playbook to bundle services and offer “Substack Plus” premium service for newsletter writers who want to sell merchandise or premium sticker packs, meet and greets, or other products to readers.

  5. Really great read, Daniel!

    It’s so clear that you know a lot in this domain. I feel like substack’s model works so well to nurture quality blog writing, and I agree that they don’t do a particularly good job of helping their readers discover different authors.

    However, this seems like a problem that can be solved with good design, so I think they have what it takes to transform and continue to be successful.

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