In the history of publishing, technological innovations tend to create the biggest inflection points, especially when it came to publishing costs. Johannes Gutenberg's invention of the movable-type printing press in 1436 lowered the cost of printing books significantly compared to laboriously copying manuscripts by hand. Texts could reach mass audiences for the first time, leading to what would later become the mass media of the modern era.

But business model innovations have also been critical in driving publishing costs lower. In the 1800s, for example, Benjamin Day invented the business model that has underpinned the news industry for the subsequent ~180 years: advertising-based revenue. He did this by founding the first-ever penny newspaper, the New York Sun. It quickly grew to become the most-read newspaper in America because, instead of charging the industry average 6 cents, the Sun charged a penny and made up lost sales via ad-driven revenue. This model was one of the first to leverage media network effects and formed the foundation of some of the largest newspapers in the world.

The advent of the internet drove down publishing costs effectively to zero, allowing writers to self-publish content and promote it to millions of people. Despite this large technologically-driven shift, however, the economic model underpinning publishing remained the same as it had before: advertising. Tech giants like Facebook and Google were later able to capture much of the advertising revenue driven by online media consumption, driving the news business into a period of crisis as revenues dried up.

In response, the number of newspapers and other publications that relied on digital subscriptions grew quickly. The Wall Street Journal was the only newspaper that required a digital subscription in 1997. By 2015, 77 of 98 US newspapers with a readership of more than 50K were paywalled. Meanwhile, although large publications were able to successfully navigate the shift, independent writers and bloggers still relying on advertising revenue were struggling.

That's where Substack comes in. Substack is a subscription-based newsletter publishing platform for independent writers. Substack makes it simple for a writer to start an email newsletter and for readers to find and follow writers whose writing they love to read and support. Substack started as a tool but is trying to become a reading destination. It has a mobile app for a native reading experience and a growing network of writers and readers with social features like recommendations and comments.

Substack was founded in 2017 by Chris Best (CEO), Jairaj Sethi (CTO), and Hamish McKenzie (Chief Writing Officer). The team met at Kik, a free messenger app that was co-founded by Chris Best. At Kik, Hamish Mckenzie worked as an Editorial Advisor, while Jairaj Sethi was the Head of Platform for nearly 6 years. Jairaj and Best are from Canada, both graduates of the University of Waterloo. McKenzie is a former journalist who has written for newspapers and magazines. He met Best and Sethi doing some communications work for Kik.

In the summer of 2017, the trio began working on a prototype of Substack by putting together an enterprise email delivery tool called Stripe along with quickly-built web publishing software. Shortly after, they used Hamish Mckenzie’s connection to Bill Bishop (the writer of a newsletter called Sinocism) and convinced him to launch the first publication on Substack.

On October 18, 2017, Bill Bishop sent an email to his 30K subscribers letting them know that his daily newsletter was moving behind a paywall. By the end of that day, Sinocism had brought in 6 figures of revenue and Substack had been formally introduced to the world. In the following months, Substack began attracting a diverse group of writers and opened up registration to the public, enabling anyone to create and monetize a newsletter publication from anywhere in the world. The company took part in Y Combinator’s W18 batch. One year into launch, they had grown their customer base to include 25K paid subscribers.

Substack is an open marketplace for writers to create newsletters and monetize them, and for readers to discover and subscribe to newsletters from their favorite writers. Alongside newsletters, Substack has recently been growing the podcast component of their product, enabling anyone to produce a paid, subscription-based podcast on the platform. Substack aims to make it so that creators can focus on the content they are producing and use Substack for other aspects of running an independent creator business, from subscription management to payments.

Newsletters

Substack provides a minimalistic interface for writers to create content. Writers can embed links, audio, and video into their newsletter to create an engaging, multi-content viewing experience. Once the content has been produced, writers can distribute it via email to their subscribers and on social media through a linked post. Each post can have a subscribe button, and a writer can keep some or all of their posts behind a paywall.

Source: Substack

Writers can also create their own customizable publication page which displays all of their work in a unique style while utilizing Substack’s backend functionality for writing, distributing, and payments.

Substack also offers a standard UI for publication pages which is ideal for new publications, and supports the creation of entirely custom pages that build upon Substack’s existing UI framework.

Source: The Free Press

Podcasts

Substack’s podcast feature is a basic-audio editor that allows users to record audio content in Substack. This recorded content can be embedded within a newsletter or published as a solo podcast episode. The podcast feature also lets users upload pre-recorded audio content. Most publications are divided into a newsletter section and a podcast section, allowing subscribers to shift between the two depending on their intent.

Source: Substack

Analytics

Substack provides writers with in-depth analytics. Writers can view a list of their subscribers, their activity (rating engagement from 1-5), revenue per subscriber, conversion rates, audience demographics, and more. This provides writers with critical information to help expand their audiences and understand their readers.

Further, writers can link their Google Analytics Pixel ID, Facebook Pixel ID, Twitter Pixel ID, and Parse.ly Pixel ID in order to track paid ad performance and better understand the conversion rates and other metrics of ad campaigns on social media.

Writers can also engage with their audience through direct chats. This enables the discussion to continue beyond a post and adds a personal touch. Further, writers can link their Twitter profile to their Substack account, prompting their followers to subscribe to them and shift the conversation from Twitter threads to Substack chats.

Customer

Substack’s initial users were independent writers looking for a way to monetize their content. This shifted over time as Substack has branched out to support podcast creators, with executives now wanting users to build “personal media empires” on Substack.

Moving forward, Substack is looking to evolve beyond a newsletter platform and become the central platform for multimedia communities. This vision is evident in Substack’s product launches. In January 2023, Substack launched private Substacks that readers have to request to join – an illustration of the company’s intent to transition from a marketplace for independent writers to a social platform for everyday users to share ideas and build a personal brand.

Market Size

The global digital news and magazines market was valued at $34.2 billion in 2021 and is expected to grow at a CAGR of 4.2% from 2022 to 2028. In addition, as Substack branches out into multimedia content, it will also tap into the podcasting market estimated at $18 billion as of 2022.

Competition

Beehiiv - Beehiiv is a newsletter platform founded in 2021. It does not charge a percentage of total revenue with tiered subscription plans for users, and supports subscriptions and ads for writers to monetize their work. Unlike Substack, Beehiiv doesn’t support videos or podcasts. It offers customizations, audience polls, segmentation, analytics, team collaboration, referrals, and a public API. Beehiiv has raised $4.2 million, recently raising a $1.6 million round from Social Leverage in 2022.

Medium - Medium was founded in 2012 and is one of the largest networks of blogs. Medium is a free blogging platform creators use to post their work and gain a following. While Medium and Substack have many similarities in the simplicity of their writing interface, the business models and visions differ drastically. Substack is focused on becoming a platform that showcases users’ personal brands, while Medium is focused on building a branded network. Writers make money on Medium depending on a user’s read time, while writers make money through paid subscriptions on Substack. Medium has raised $163 million in funding.

Ghost - Ghost is an open-source publishing platform. It was founded in 2013. It offers referral programs, push notifications, social sharing, payment gateways, A/B testing, a desktop editor, a mobile app, comments, and more. Unlike Substack, it offers subscription plans and doesn't take a cut of the revenue writers make.

TinyLetter - TinyLetter is a personal newsletter service offered by Mailchimp. People use it to send updates, digests, and dispatches to their fans and friends. It also provides design tools that are the same as a standard email client.

Patreon - Patreon is a membership platform that allows creators to run a subscription service for their content. It was founded in 2013. Unlike Substack, where you simply charge people for access, Patreon provides creators with more business tools to experiment with offering content in the first place. A creator can make different subscription tiers on their Patreon page to provide subscribers with bonuses. Patreon has raised $412 million in funding.

Substack is entirely free for newsletters that don’t choose to charge readers. For newsletters that do opt to require a paid subscription from their audience, Substack charges a 10% commission + 3% Stripe transaction fee. There are no paid tiers, and the commission is fixed, regardless of the size of a newsletter.

In 2021, Substack reported that they grew to over 1 million paid subscriptions, up from 50K in mid-2019. The company did not disclose the number of free subscribers. Additionally, Substack disclosed that the top 10 writers on the platform make a collective $20 million in annual revenue. In 2022, Substack stated that its network drives more than 40% of all subscriptions across the platform and 12% of paid subscriptions.

In February 2023, Substack reached 2 million paid subscriptions with over 20 million monthly active users and $9 million in revenue at the end of 2021.

To date, Substack has raised a total of $86.2 million in funding. Substack raised a $65 million Series B round led by Andreessen Horowitz in September 2021. The post-money valuation on its Series B round was $650 million, representing a ~70x multiple on $9 million of revenue at the end of 2021.

In May 2022 as tech company valuations struggled in both public and private markets, Substack announced that it had abandoned its original plans to raise a Series C round. Shortly after that, in June 2022, Substack announced it was laying off 13 employees, mainly in the human resources and writer support function divisions.

Multimedia Content

As Substack continues to mature, there is an opportunity to focus on alternative forms of content, including podcasts. Substack can reach large audiences by creating an end-to-end platform that showcases a user’s writing, audio, and video work. This may enable newsletters and blogs to become more engaging, offering alternative forms of content to freshen up the audience experience. Further, it could encourage content creators to build more of their brand on Substack as it can host their entire online presence, from written content to audio and video.

Network Effects

As Substack grows, it has the potential to enable writers to benefit from network effects and grow its platform further. An early example is the launch of Substack’s recommendation feature, which lets writers recommend other newsletters to their readers. This drives subscriptions to newsletters, incentivizing new writers to join the publishing ecosystem that Substack has built.

Substack can also recommend newsletters to readers based on their subscription history, and this helps drive revenue for writers while improving the user experience. Instead of paying independent subscriptions to newsletters, Substack could let users bundle subscriptions together. For example, instead of paying $20 for two newsletter subscriptions ($10 each), users could pay $15 to access both newsletters if they had a bundle option. This would grow the writer ecosystem further and potentially expand revenue opportunities.

Barriers to Multimedia Expansion

As Substack seeks to grow into a platform that hosts multimedia content like podcasts, it faces an uphill climb to gain traction in a field with dominant incumbents, including podcasting platforms like Apple and Spotify. In 2021, 31.7% of all podcast listeners used Spotify, while Apple captured 26.9% and Google captured 2.9%. Convincing users with existing listening habits to shift platforms may be difficult, especially as Spotify has a large library of 5 million free podcast titles. Thus, while Substack’s early bet on the fact that users are willing to pay a premium to access written content from their favorite writers proved to be true, it remains to be seen whether the same thesis will be true for the podcast space.

Consumer Focus

By expanding to other forms of content, Substack could lose popular writers as it tries to strengthen its consumer brand by trying to become another social network or news publisher. The prominent analyst and writer Ben Thompson, whose tech newsletter Stratechery helped inspire Substack, wrote that Substack has gone from being a “faceless publisher” to trying to put “the Substack brand front-and-center.” He added:

Substack’s expansion and desire to grow its brand is evidenced through the launch of its centralized mobile app, attempting to bring the reader into a Substack-controlled experience. But, as noted by Ben Thompson, this could backfire in the long term.

Content Moderation

Substack has come under scrutiny for its hands-off approach to content moderation and its decision to opt for community moderation, where publishers set their terms of engagement and readers choose which communities suit them. While this attracts many writers, others have become increasingly frustrated with insufficient content moderation. Finding the right balance between ensuring content is accurate while limiting top-down moderation is a difficult task that other content platforms have also struggled with. Substack will need to figure out how to keep all its writers satisfied with its moderation policies and apply them consistently.

Substack has reached a pivotal stage. Its initial bet on a subscription-based model instead of relying on ad-based revenue worked, and that has driven significant growth on the platform. With 2 million subscribers and 20 million active users, Substack is now better positioned to take the next step and become an economic engine for cultural production. Yet, as Substack seeks to mature, its biggest challenge will be around expanding its revenue sources and product offering while remaining true to its initial mission of making it simple to create a publication that brings in money.