Substack was founded in 2017 to provide writers with an easy way to distribute content to readers via email. There is no cost for sending out free newsletters and Substack takes a ten percent cut of revenue from writers who charge for content. The platform does not have advertisements. Substack only earns revenue when readers establish a relationship with independent writers by purchasing a subscription.
According to disclosures in a recent securities offering, Substack has 35 million active subscriptions including 2 million paid subscriptions. Readers have paid writers a cumulative total of $300 million. While only a small percentage of writers earn a full-time living on Substack, the platform provides writers with a way to get paid for their work. This is a major accomplishment in a world drowning in free content.
Until recently, Substack and Twitter have coexisted peacefully because there has been minimal overlap between the business models. Twitter is a microblogging platform and Substack facilitates longer form writing. However, the lines have blurred in both directions. Subscribers of Twitter Blue can now post tweets of up to 10,000 characters which is equivalent to a 1,500 to 2,000 word article, and this week Substack rolled out its Notes platform which is very similar to Twitter’s overall look and feel.
The impending public rollout of Substack Notes irritated Elon Musk enough to result in Twitter restricting access to Substack links last week. Tweets containing links to Substack could not be retweeted and clicking on such a link resulted in a “warning” about the link being unsafe or spammy. Substack content was also not visible in Twitter searches. These restrictions have been lifted at the time of this writing.
My initial experience with Substack Notes has been positive. The interface is almost the same as Twitter but without advertisements. While the software engineering effort to replicate Twitter’s functionality, look, and feel is not trivial, many companies would be able to create such a software platform. The success or failure of a social network hinges on network effects rather than engineering innovation.
From April 2022 to January 2023, The Rational Walk offered a paid subscription option. During that time, Twitter represented the “top of the funnel” for acquiring new subscribers. A consistent relationship existed between the number of Twitter followers and the number of free subscribers on Substack. A small percentage of free subscribers would eventually convert to paid subscriber status. Many writers with paid Substack offerings rely on Twitter for acquiring the majority of their readers.
Substack Notes has the potential to displace Twitter as the “top of the funnel”. Initial results are promising. After posting a few notes yesterday, The Rational Walk added an unusually large number of subscribers which indicates that a strong network effect is in place. Whether this network effect persists over time or represents a one-time boost is a question that cannot be answered yet. The power of the Substack network is that readers attracted to a certain type of content can easily discover similar publications. Promoting discovery is a key part of Substack’s overall value proposition and represents the primary justification for the ten percent fee on paid publications.
Even though The Rational Walk no longer has a paid offering, I admit to still being motivated by the number of subscribers who sign up. However, I am not motivated enough to be willing to use Twitter on a regular basis because I find that platform dystopian and unethical, especially when it comes to censorship of content. So far, Substack has behaved in an honorable way and has a business model that represents a clear win-win-win proposition for Substack, independent writers, and readers.
Substack released financial statements for 2020 and 2021 as part of a fundraising round that is currently underway. Substack does not currently have a profitable economic model and it is not at all clear that the business will scale up to a sustainable level without introducing advertising or increasing Substack’s percentage of gross subscription revenues. Evaluating early stage businesses like Substack is beyond my circle of competence, but I wish management and shareholders well!
I am not sure how I will use notes in the long run. Unlike articles, readers will not receive email notification for notes, but feel free to follow along.
As always, thanks for reading!
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