Substack is the Biggest Threat to Newsletters Ever

19/4/2023

Substack is to newsletters what Spotify is to podcasts, Medium was to blogs, and what Google Reader was to RSS: an aggressive player that dominates an entire segment with artificial and unsustainable advantages in a risky bet. It’s a kind of corporate time bomb that, when it explodes, will destroy countless small businesses based on newsletters.

Notes, the Twitter clone that got a huge advertising campaign from Elon Musk for free, is already a symptom of the threat Substack represents.

Newsletters alone are not a business capable of the growing levels that could satisfy Silicon Valley investors’ appetite for stratospheric profit. It takes much more than a healthy business — which Substack isn’t yet — to achieve that.

Between 2018 and 2021, Substack raised USD 82.4 million from VCs such as Andresseen Horowitz (a16z) to grow and deploy its business model, which consists of charging 10% of paid subscriptions that writers collect from their readers. (If a writer doesn’t charge for their newsletter, Substack earns nothing.)

In 2022, the company tried to raise more money, without success. Faced with failure, it went to retail and raised another USD 8.5 million from ordinary people.

In deciding to go this way, Substack had to open up some numbers to convince people to invest. In 2021, the company made $12 million and had a loss of $22 million. The 2022 figures were not disclosed only because the founders didn’t want to, a move that doesn’t inspire confidence.

The launch of Notes, its chat feature, and the release of an app are building blocks to create value for users, yes, but also to wall off the platform leveraging its newsletter thing.

In several interviews, Substack founders make the point that people who have newsletters on the service can leave whenever they want. And it’s true. The point of Substack, however, is to become synonymous for newsletter, to become a first irresistible, then inevitable destination for anyone who wants to have one.

Only this path is not a smooth one. As it gains prominence in the relationship between writers and readers, Substack will have to deal with new challenges. For example, with Notes, which has an algorithmic timeline, it will need to moderate content.

In an interview with Nilay Patel on Decoder podcast, Chris Best, co-founder and CEO of Substack, refused to answer whether his company would remove explicitly racist content from Notes. (This excerpt is embarrassing.)

The founders’ thesis, of Substack being a “economic engine of culture,” is pretty weird: Substack would function as a kind of ideal destination for those who want to own, promote, and make a living from newsletter, i.e., a platform, but without the headaches that running a platform usually brings, and somehow, even though it’s a closed and private platform, people can trust that the management will always do what’s best for writers and will never go full Elon Musk-ish in the future, even though that’s always a possibility.

I listened to the entire Decoder interview, the CEO’s explanations and promises and, like Nilay, I was not convinced what the big deal is about Substack except for it being a free newsletter service funded by venture capital and run by tech bros.

Nevertheless, the clash with Twitter and the Notes launch has resonated well. Ernie Smith of Tedium is also skeptical about the future of Substack, but has been moved to the point of launching a “lite” version of his newsletter there, in what he calls a “defensive measure.” If Substack really does become synonymous for newsletters, not using it could be the end for small businesses like his.

Ernie advises others to follow his example. I advise against it, for the sake of newsletters.

I understand the appeal of Substack. Sending emails isn’t expensive, but it’s not free, and a completely free service like Substack is tempting. I would even say it’s the single reason so many newsletters have sprung up in recent years. On other newsletter platforms there is a big gap between a limited free tier and the first paid ones, which can be expensive for amateurs writers.

The fact that Substack is the only one that is totally free is no accident. Someone is footing that bill; they are not philanthropists and these people are going to demand to get paid pretty soon.

Discuss @ Hacker News.

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