Why Substack is Doomed
The founder’s of Substack first posted on HackerNews in 2018, claiming “paid email newsletters made simple.” Yes!, I thought. Finally!
Rockstar thinkers like Ben Thompson (Stratechery) and Web Smith (2PM) wrote paid email newsletters (and still do). Substack understood the difficulties of building that infrastructure and delivered a platform to allow writers simply to write. Brilliant!
But not all that glitters is titanium.
My prediction: Substack is doomed.
Why? Well, let’s do a quick primer on how a publishing company can monetize content.
In order to understand why Substack will fail, I need to give an overview of the current state of the publishing business and monetization. There are primarily two ways for a publishing company to monetize.
Advertising - The model is get as many eyeballs as possible focused on your content and resell that attention on behalf of your advertisers.
Subscription - The model is to create content and have your audience pay for it.
These aren’t the only ways to make money. We have seen publishing companies, especially B2B companies, focus on events or industry research. Skift, a media company focused on the travel industry, is a good example. However, this is the exception to the rule, not the norm.
The reason people would pay for newspapers in the past is because of distribution. Someone needed to physically hand the audience a product. The publishing company’s biggest value was distribution. The rise of the internet has eliminated this. Facebook and Google have replaced the delivery trucks. Substack’s model is the most valuable asset to a publishing company is its writers. If they could build the infrastructure needed to support them, they could monetize their audience while remaining independent. But is monetization a real opportunity?
The Mindset of Free
Substack’s whole business relies on the audience paying for content. A study conducted by a Danish group, Audience Project, found that only 13% of Americans are paying for online editorial content. People don’t want to pay. This isn’t a fault of Substack, but of the media industry. When the internet began, they distributed their content for free instead of charging. This trend led consumers to assume that the news would always be free. The rubber has finally hit the road and the media industry realized they have a flawed model. The damage is already done. With that being said, I do think there is some content that people are willing to pay for. Content that is personality-driven where you only want to hear from the writer. Again, that’s why Ben Thompson has been successful. Anyone can read about the technology industry, but there is only one place to read Ben Thompson’s writing. Even if audiences do pay for content, I don’t believe it’s a billion dollar opportunity.
Is Substack Scalable?
Venture firms want to invest in scalable businesses, not lifestyle businesses. Substack, by taking venture money, needs to figure out how to scale to a billion-dollar company in the next 10 years. The most obvious model is Ben Thompson’s faceless publisher model. Substack will act as infrastructure for the next generation of publishing companies. The basics of this argument are that publishing companies will be focused on creating content while another will be in the background building the infrastructure. Ringer Media, for example, runs on Vox’s tech platform Chorus. Yet if you go on Ringer’s website, there is no mention of Vox. In order for Substack to achieve this model, they need millions of subscribers and thousands of successful publications on their platform.
In July 2019, Substack had 50,000 subscribers. If we assume the subscriptions are $100/yr, that means Substack is bringing in $5,000,000 in annual payouts which equates to $500,000 in revenue (10% cut). Let’s assume that Substack’s valuation is 10x revenue that means they need to hit $100MM in annual revenue to achieve a billion-dollar valuation. I don’t foresee enough people paying for niche newsletters for this model to be feasible.
Judd Legum argues that Substack does have a scalable business model:
“The NY Times has 3.9M digital subscriptions with 1,700 journalists which equates to 2,300 subscribers per journalist.”
This argument assumes that all journalists are created equal. The majority of journalists aren’t superstar journalists. Even the most ardent reader of the NY Times couldn’t name more than 100 writers who work there. Audiences are scalable, but quality content isn’t. This also fails to consider that The NY Times employs hundreds of staff people who aren’t journalists. You can’t build a publishing company with just writers.
I hope I’m wrong. I want Substack to succeed. I’m a huge fan of the company and many of its writers. However, at the end of the day media consumption has changed because of the internet. People expect free content and the writers they are willing to pay for are few and far between. Substack has to overcome these challenges if it wants to be the next billion-dollar company.
Thank you Gabriel Murcia and Randal Doane for reading drafts of this