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Before reading this post, check out Part I of this newsletter.
As you might have noticed, Substack newsletters don’t include any advertisements. In fact, the intentional decision to maintain an ad-free environment is a core part of Substack’s ethos. Chris Best, one of their founders, has even argued that the advertising model for podcasts is wrong, too (he suggests they transition into paid subscription models).
But just as Google retracted its “don’t be evil” mantra, nothing would stop Substack from breaking its “no advertising” promise.
Tim Ferriss, author of “The 4-Hour Workweek” and many other bestsellers, hosts one of the top podcasts on iTunes, boasting millions of subscribers. He recently attempted to move from an advertising-based model to a subscription-based one. Despite signing up significant numbers of subscribers, he ultimately reverted back to the original, advertising-supported format. Ferriss chronicled the process on his blog:
This is a quick public service announcement: I will be stopping the fan-supported podcast experiment and moving back to an ad-supported podcast. This post will explain a few of the reasons…
The feedback and data have been overwhelmingly clear. Given the size of the audience — the podcast passed 400 million downloads a month ago — experiments can sometimes yield conclusions much more quickly than expected…
It turns out that most of my listeners have a strong preference for an ad-supported model compared to other options. Many folks have come to use the podcast and 5-Bullet Friday for discovering new products and services, and that has been reflected in the comments since launch. After weeks of consistent feedback from my audience, it’s now loud and clear that my vetting and sharing of sponsors is better received and a better fit…
Pre-launch polling on social media almost perfectly predicted the outcome. Here’s the tweet I used to test the waters, which had nearly 18,000 respondents. The results were:
72% – No, I wouldn’t donate.
24% – I would give $5 per month.
4% – I would give $10 or more per month. [Emphasis mine]
Whether Tim is correct that people prefer the ad model, or Chris is right that people favor the subscription model, the answer is probably more nuanced. An ad-supported approach could be right for some newsletters, while a paid subscription model could offer the best fit for other newsletters. Plus, some newsletters would optimize their revenue with a combination of both (like The New York Times).
Substack is ideally positioned to identify which model would provide the greatest benefit for any given newsletter, and then provide the tools for both the subscriber- AND ad-supported models. Remember: Amazon didn’t start with advertising either, and now it’s one of the company’s most impactful drivers of growth.
What happens when we combine newsletter advertising with the previously mentioned ideas about newsletter promotion and customer acquisition? Substack newsletters could cross-promote its content. In the same way that a great place to advertise your podcast is on another podcast, an ideal location to advertise a paid publication newsletter is inside another paid publication newsletter. Substack could figure out which newsletters complement the ideas from other newsletters, and then allow writers to recommend each other — for a cut of each other’s revenue (less the 10% share going to Substack, of course).
When you subscribe to The New York Times, you are, in a sense, subscribing to a bundle of individual writers. News at this point is a commodity. Any big and interesting story will be covered by everyone — including free publications. When you subscribe to the Times, you’re essentially paying for two things:
Curation: a well-informed team reviews all the news of the day, flagging stories that are worth your time to read.
Exclusive access to specific writers: a subscription is the only way to access notable columnists like Ross Douthat or David Brooks or Paul Krugman or Thomas Friedman or Maureen Dowd.
How many people subscribe to The New York Times solely for the reason of reading Paul Krugman? Does the Times underpay their columnists in order to subsidize their investigative journalism? Ben Thompson writes about the opportunity for small individual publishers to ‘disrupt’ local journalism. What if Substack could disrupt high-profile columnists?
New York Magazine estimates that Times columnists earn between $150–$300K. Suppose Substack hired the entire Times roster of columnists; the platform could build a de facto Times op-ed section for only $1.5–$3 million a year. If Substack charged $200/year (undercutting the Times’ fee of $300/year), they would only need 7500–15,000 subscribers to cover the writers’ incomes. Every single additional subscriber would yield pure margin.
Consider the Netflix model: they pay fixed prices for content (movies and television shows), distributing it to an enormous customer base. Because they have the most subscribers, they can afford to pay the most for any given piece of content. Because they have the most content, they can attract the most subscribers to pay the most to subscribe.
Could Substack follow the same blueprint for certain types of journalism? Suppose Substack created a free ‘best of Substack’ newsletter to build up a solid level readership. And then, the leap of faith: use venture capital support to poach top columnists from major newspapers, bundling the content together in a premium package. In order to access the content, people would need to purchase a subscription — paid directly to Substack itself. Whenever Substack discovered a buzz-worthy writer — on their own platform or an external source — they could ‘buy them up’ and fold their content into the premium package. Depending on their situation, the writer might lose some autonomy and/or stability, but they could accelerate both their readership and their income. I expect many writers would accept the offer to join Substack’s premium package.
Over time, Substack could build a media empire, without the hefty costs of investigative journalism.
This plan might not work, but I still believe it would have a better chance of succeeding than Apple News.
There is a tendency for users of digital platforms to talk endlessly about their favourite platform. People on Twitter debate Twitter’s idiosyncrasies FAR more than people off of Twitter would ever care about (Reddit is even worse for in-group debates). And here I am, writing my longest newsletter about the platform I use to send the newsletters — to readers who likely had no idea what Substack was before they started reading today’s newsletters.
That said, I hope my discussion of how Substack COULD grow into a billion dollar company offers some insight into the decision-making process of a company in its early stages.
Keep in simple,
Edward Nevraumont is a former CMO of General Assembly and A Place For Mom. He now serves as a Senior Advisor across Warburg Pincus's portfolio of companies.