How Substack Grows

Substack should aggregate readers to accelerate its flywheel.

Audio version: Spotify | Anchor

Eric: Substack charges a 10% fee to writers and that's pretty high. And the problem with Substack right now in its current business model is that it risks being disrupted. Right? By another service that provides the same functionality at a cheaper price point — It's just a commodity, it's like, can you send paid newsletters? And as long as Substack keeps its current model, you know, it'll always risk being disrupted by a newcomer who offers to do the job for cheaper, right?

As long as it just focuses on being supply side, it can be swapped out at any point in the value chain, by someone who offers to do the job cheaper. 

But if Substack pivots, I wouldn't even say pivots, but it just increases its mission to include aggregating and generating, you know, reader demand, it's a much safer position. It has a much stronger moat, right. you know, imagine that Substack was able to offer, you know, a personalized algorithm, right. Where it knows what I like to read. It knows what the best performing pieces on Substack are. Right? And it can start to lead me and direct me towards writers that I like.

Once that occurs, then Substack starts being a destination site, right, for readers. And then people type in substack.com when they want to read, you know, great long form writing. And then once it has readers on board well then you know, all these writers will be like, you know, I could start my own independent blog, you know, I manage my own payments, you know, use member full plus MailChimp, you know, to make sure I like send out a paid newsletter.

No, but I liked, you know, Substack because, you know, it offers us like personalized feed, you know, and like targets by readers. It helps discovery. Right? You know, people will discover my blog, you know, I'm just an up and coming new writer, you know, who's ever going to find me, you know? And so they're like, Oh, I want to hook in the Substack.

Right. And so now all of these writers are like, you know, coming into Substack because they want some of that readership, you know, that Substack is able to generate. And then that's where we start to see the flywheel turn. Right. As more like writers come onto Substack that means more readers want to go there because they have much better writing from this wide variety of writers that are on the platform.

And then cause they have more readers, more writers want to write on Substack. Right. And so now you have this increasing flywheel and so that kind of  justifies their 10%, you know, cut of writer revenue.

A way to think about it is your writers are your talent. Take like an old media organization, like the New York Times, right? Yeah.

All of its value is in talent. Right. It's not that it can produce a website, the whole value that accrues to the company, the New York Times, is because it's writers produce content that people want to read.

And so I think in any kind of supply side oriented company, you're always just going to be at the service of talent. You know, the best writers will go to whatever place on the internet where they think that their talents are best monetized, and so you're always in a scramble, I would say to the bottom.

Sophia: What do you mean by that? 

Eric: There's always some service that will come along and offer to do the same job for cheaper — instead of taking 10% taking 5%. 

Substack also has some network effects, right? Yeah. So like, hey, I started my Substack, I'm now able to make an independent living off of it.

Matt Taibbi, like quit Rolling Stones magazine and is now just going all in on Substack. But the thing is like, it's now possible for a journalist to be independent. They don't need to be behind a brand. Yeah. Because all the tools that they need are available to them. And so if you are this, you know, wannabe independent journalist, you're going to go with a tool, you know, that's reliable, that other people use, right. To minimize your risk. Right. And so Substack does have a little bit of network effects in the sense that like, as more writers during the platform, then more and more writers will join the platform because it's known as a reliable service. 

Sophia: Yeah, that's true. Although I can still see like for the writers who joined the platform like a risk is similar to the problem that you're facing right now is like how to find customers. Cause it's like, initially it's going to be pretty hard, right. To generate enough audiences to give them enough revenue to have a living.

Eric: Right. I mean, this is, sort of a chicken and egg problem, I would say.

Yeah. Right. In any two sided marketplace — do you generate demand? Do you generate supply? I think something that's helpful is to like look at Uber, should we focus on demand side? Should we focus on supply side? The direction they took is — they focused on supply side.

They're kind of thinking, was that like, look, there's going to be demand for transportation within cities. People are going to need to get from A to B within a city. It's almost like, our demand is guaranteed — But our supply is not. If drivers don't like using Uber as a platform to like, you know, make a living, they won't use Uber. They'll use another service. Right? So Uber like really focuses a lot of its attention on like acquiring and retaining the supply side of the equation because they believe that like the demand side was kind of a given, right. That people needed to move around in the city. 

Sophia: Interesting. Yeah. Cause I'm trying to think about is demand a given though? Cause it's like, yes, I can move — Like if there's always gonna be demand to move around, but then there are so many services to use. 

Eric: But you know, kind of what we were talking about was like, is demand a given, right? That was a question. And I would say, not always, you know, sometimes part of it's like you got to drum up your own demand too. Like — Is there a demand for, you know, 280 character messages? It’s like, I don't know.

Sophia: They created it.

Eric: Right. But they, like, they created it. Right. It's like the best companies create their own market. Right. And it's like Uber is like vastly bigger than a taxi market because it just simplified demand. Right. It's like, if you wanted to get from A to B now there's a button you can push on your phone.

Yeah. Um, so that vastly increases the market size. Right. And so if you increase the market size, that's a total demand. Right. And then it's like, you want to capture some portion of it.

I think if your service has value to like an end user, I would say that increasing demand, I think is almost like a requirement.