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Substack found its unfair advantage

From the very beginning, Substack’s greatest advantage was also its greatest weakness. 

Writers flocked to it because they had grown weary of the social media algorithms that seemingly governed all content businesses. They watched as their colleagues fell victim to round after round of layoffs — all precipitated by shifts in Facebook’s priorities  — and meanwhile Substack offered a mostly decentralized content delivery system: email. By merging free newsletter delivery and subscription payments, it served as a safe launching pad for writers who wanted to forge a more direct connection with their fans.

But the problem with decentralized delivery is that there’s no user lock-in. It’s incredibly easy to export your email list into an Excel spreadsheet and migrate it to a new platform. At first this didn’t matter, since Substack was really the only newsletter payment platform on the market, but as new competitors emerged — Revue, Ghost, Beehiiv — then suddenly writers started openly wondering why it deserved its 10% commission on all subscription payments.

Perhaps the most worrying trend was that some creators would build their audiences on Substack’s free platform, only to migrate off it just at the exact moment they started making serious money. Substack basically helped them build their careers but then couldn’t benefit from the financial upside once those careers took off. And you could hardly blame the creators themselves; by moving to platforms that charged a flat fee like Ghost, then those writers could take home a greater share of their income.

Substack’s initial answer to this dilemma was Substack Pro. It basically scouted out writers with already-existing audiences and paid them cash advances to launch newsletters on Substack. The contracts were structured so that Substack took home 90% of all subscription revenue for the first year, with the remaining 10% going to the author. Once the contract ended, then the payout structure reversed, with the author taking home 90% of all revenue.

Substack’s bet with these writers was that they’d build up such big businesses on the platform that they’d want to stay once the advance ran out. Those authors simultaneously served as an advertisement for Substack itself; writers were more likely to sign up for an account if they already knew of other writers on the platform.

But this approach had its flaws. For one, many of the Substack Pro writers didn’t pan out to be great content entrepreneurs, and they failed to earn out their huge advances. And of those who did succeed in building successful businesses, several simply picked up and left the platform the moment their contracts expired. 

That’s part of the reason that Substack began scaling back its Pro program this summer. “2021 was a year that we could be less cautious in terms of how we use our resources to help writers get off the ground and help them start their businesses,” co-founder Hamish McKenzie told The Information. “We have to be much more cautious. We have to think ahead. We can’t just bank on easy-to-get venture capital at good prices to be there, to be able to pass on to writers immediately.” The ROI, in other words, just wasn’t there.

Substack also doesn’t need Pro anymore to attract and retain users. That’s because it’s finally found its unfair advantage: its Recommendations tool.

An unfair advantage is defined as “when a business operates with a unique selling proposition that competition just can't match.” Google’s unfair advantage is its 20+ years of user search data that makes it nearly impossible for other companies to compete with its search engine. Facebook’s unfair advantage is its social graph, which brings with it all sorts of network effects that help amplify content. 

One of the great things about Substack’s Recommendations tool is it introduces network effects without the inclusion of algorithmic favoritism. Remember, Substack’s central ethos is that it establishes a direct connection between writers and their fans; any launch of a Facebook-like algorithm would be in direct betrayal of this ethos. What’s genius about Recommendations is it allows Substack to walk that thin line perfectly.

Here’s how it works: every Substack writer is prompted to recommend other Substack newsletters, and they’re even given the opportunity to write small blurbs about why they recommend them. Then, every time someone signs up for your newsletter, they’re brought to a landing page that shows them all of your recommendations. If their email address is already verified with Substack, they can simply push a button to sign up for all the recommended newsletters. It’s basically an old-fashioned blogroll on steroids. 

Substack launched the Recommendations tool earlier this year, and many writers saw an immediate effect. “Our data shows our platform ecosystem is responsible for 1 in 3 new free signups and 1 in 10 new paid signups,” tweeted Linda Lebrun, who works on writer partnerships at the company. “When you publish on Substack, the power of this network is working for you.” I’ve seen several writers post charts to Twitter that credit Recommendations for an uptick in growth. In the past 30 days, it’s driven 71% of my own signups.

Are those high-quality signups? So far, my open rate has remained steady, while my click-through rate has taken a small-but-noticeable dip. I’ll probably be a little more vigilant moving forward about cleaning my list. But overall, I’m encouraged by the results, and while I had other reasons for wanting to stick with Substack as my publishing platform of choice, I now have even more incentive to do so.

As I was writing this piece, Facebook announced it’s shuttering its Substack competitor, and it’s been clear for some time that Twitter scaled back its newsletter ambitions. While there will still be plenty of writers who want to leverage more customizable platforms like Mailchimp and ConvertKit, Substack remains the best turnkey solution. It’s built its economic moat, and now that 10% commission is much easier to swallow.

What do you think?

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Let's talk about building an online community

Over a period of a few years, hundreds of publishers shut down their article comments sections, but many are now waking up to the idea that they should have a more direct relationship with their audience. Some have launched online communities — both free and paid — on platforms like Facebook Groups, Slack, and Discord.

On Thursday, I’m going to be hosting a live Zoom call where we can talk about how to attract, nurture, and monetize those communities. You can find the login details over here.

Quick hits

Another "ad free" newsletter gives into the temptation and starts accepting ads (that's a good thing). [Tangle]

If you're looking to sell your content business, you might want to target buyers that operate outside the media industry. [They Got Acquired]

A good media startup playbook is to start small and niche, and then gradually begin expanding into related niches as revenue allows. The Information also followed this playbook. [Axios]

Instagram has completely devalued still imagery, providing an opening for other platforms to poach all of its talented photographers and artists. [NYT] From the article: "Last year, Ms. Mueller, who lives in St. Louis, started focusing instead on Twitter, where she discovered a burgeoning community of artists."

A well-known economics writer explained why he moved from Ghost to Substack. It turns out that Ghost's DIY platform is a lot of work to maintain and doesn't have as much functionality as Substack. [Full Stack Economics] From the article: "Substack charges writers 10% of their revenue, and over the years I’ve seen a number of people wonder how they’ll hold onto writers while charging that much. After trying out the leading alternative, I think Substack’s investors have nothing to worry about."

ICYMI: Can a former Myspace CTO drive the creator economy's next evolution?

With Koji, Dmitry Shapiro wants to build content monetization tools for the open web.

Want more off-the-cuff media punditry from me?

Then you should follow me on Twitter. Fair warning: I do sometimes tweet about non-media stuff.