Substack Doesn't Want You to Leave

Substack is in trouble, and their recent feature releases are evidence of that.

This is a newsletter primarily about political and social ethics, but it’s also a newsletter that switched away from Substack a couple of months ago, for reasons related to the way Substack leadership runs their company. Those are bound up in ethics, even if not in the way I typically write about, and I also know that a lot of my readers have their own newsletters, and so are interested in the state of that ecosystem. So bear with me as I dig into a very odd new feature Substack proudly announced today: Direct messaging. From their post:

Direct messages live in the Chat tab on the Substack website and app, and appear alongside chats from your subscribed publications. You can start a DM from any writer or reader’s profile page, from the Chat tab, or by hitting “Share” on a post or a note. When you receive a DM, you’ll be notified in the app and by email.

Why would Substack add “direct messaging,” when, as a reader, you can already direct message with Substack authors you subscribe to by just hitting “Reply” in your email? Why add a new direct messaging system within the official Substack app?

First, it’s important to understand how Substack’s newsletter infrastructure works. When you start a Substack, and people subscribe for free, they’re adding their email addresses to your list. That list, whether it's a handful of your friends or tens of thousands of addresses, belongs to you. You can, at any time, download the list and, if you want to, upload it to another newsletter platform, such as Ghost or Beehiiv. (The latter powers my own newsletter, and I’m a huge fan.) In other words, the main connection point you have with your readers (their email address) is portable. You can leave Substack, take your list elsewhere, and continue sending newsletters to your readers, without them having to resubscribe to you.

Just as important to understanding what’s happening with Substack is how their system handles paying subscribers. With free subscribers, you have a connection point: an email address. With paying, you have two: an email address and a credit card number. That’s why, if you turn on premium subscriptions in Substack, you have to link your Substack publication to a Stripe account. Stripe is the big player in online credit card processing. As a reader, when you pay for a Substack, you’re giving your credit card information to Stripe, and it’s Stripe that stores it, not Substack. And here’s the important bit: Most other newsletter platforms use Stripe for handling paying subscribers, too. The result is that, as a Substack publisher, even your paying subscribers are portable. Want to move to Ghost or Beehiiv? Download your Substack subscriber list, import it into the new platform, and then attach that new platform to the same Stripe account you were using for Substack. Run the handy automated migration tool your new platform comes with, and your paying subscribers will keep getting your premium content—and keep giving you money each month—without any need for them to resubscribe.

That’s a big deal. It means that, as a publisher, you aren’t locked in to Substack. You can use it to build a huge platform, or even a huge business, and then just ... leave. It doesn’t cost you anything to do that, and the whole process takes maybe a couple of hours. That’s good for publishers, because platform lock-in is bad. And it’s a selling point for Substack, because they can say to writers, “We’re giving you great tools, and you can use them as long as you like them, and as long as you think they’re worth 10% of your earnings, but if you decide you’d rather be elsewhere, we’re going to make it easy and painless for you to switch.”

Nothing Substack has done lately changes any of that. You can still build a large audience there, and have a large number of them paying you, and then take it all with you if you jump ship. But that’s not the whole story. Because the other half of it, and the other key to understanding why Substack would add “direct messages” in its app, is Substack’s financials.

Running a platform like Substack isn’t cheap. You’ve got staff, infrastructure, and the costs of sending untold millions of emails. This is made worse by the fact that Substack gives most of it away for free. This is why they’ve grown so quickly and become so dominant. Unlike nearly every other newsletter platform, they don’t charge you anything to host a free newsletter, even if you have thousands or hundreds of thousands of subscribers. And if you do turn on premium subscriptions, their pricing model is to take 10% of your earnings, instead of asking for a fixed monthly fee. But this also means Substack needs to earn a lot more from each of the people who are running paid newsletters than other platforms, because it’s giving away so much for free to those users who aren’t. (My own Beehiiv, in contrast, offers its platform for free if you have 2,500 or fewer subscribers and don’t charge for subscriptions, and then a flat $50 or $100 a month if you want to change, and depending on which features you need. But it doesn’t take any cut of your earnings beyond that.)

This all works if Substack is making a lot of money. But they’re not. In their prior feature announcement, made on February 22 and introducing an upgraded recommendations system, they included this quite telling line: “In its short life, Recommendations has become an indispensable part of the Substack network, which in recent months has swelled to more than 3 million paid subscriptions to writers and creators.”

There are 3 million total paid subscriptions across Substack’s network. Now, 3 million is a big number, sure. But what does that mean for Substack's actual earnings? Not good news. Let’s ballpark it by assuming that the typical subscription fee newsletters charge is $8 a month. That’s the default Substack sets the price at when you turn on premium subscriptions, so it’s probably a pretty good guess. And let’s also assume, to make the math easy and to paint a rosier picture for Substack, that all of those 3 million subscribers are paying monthly, instead of getting the annual discount.

Three million subscribers paying $8 a month works out to $288 million a year flowing into the Substack network. But the company itself pockets just 10% of that, because the other 90% goes to the writers generating those subscriptions. So Substack’s actual take is, by this estimate, $28 million dollars a year. Which is tiny. Even if $8 is lowballing the typical subscription fee (which I suspect it isn’t, because my strong guess is the typical fee is closer to $5 a month), by any reasonable measure Substack isn’t bringing in enough dollars to cover their costs.

With that in mind, go back to the discussion of portability. If you’re a big publisher on Substack, generating let’s say $10,000 a month in subscription fees, you’re taking home $9,000 and giving Substack $1,000. (You’re not actually taking home $9,000, because you’re also paying credit card processing fees to Stripe, but we can ignore that for purposes of the analysis here.) That’s $12,000 dollars a year you’re paying to host your newsletter on Substack. If you went to Beehiiv, and chose their most expensive plan, you’d be paying $1,200 a year.

What this means is that, the bigger your newsletter gets on Substack, the more reason you have to leave Substack, because you can save an extraordinary amount of money by doing so. And, as we discussed above, it is very easy to take the email list and paying subscribers you built on Substack and do just that. You’re not locked in, and the more money you earn for Substack, the more reason you have to stop using it.

To fix that and get their financials on a steadier path, Substack needs to make it harder for you to leave. They need to lock you in. Now, they’re not going to prevent you from downloading your email list, nor are they going to force you off of Stripe. (They might at some point, if things get bad enough, but their whole brand is built on not doing so, which makes it feel like a last resort move.) Instead, the way they build lock-in is by shifting the primary points of connection between you and your readers from open and portable email addresses to closed and proprietary relationships.

And, thus, “direct messages.” Thus the “followers” you get in Substack Notes. These are points of contact between you and your readers that aren’t portable. If you leave Substack, you’ll lose them. The hub of all of this is the Substack app, and a great deal of the feature announcements they’ve made lately are about getting more and more people to view the app as the primary way they read Substacks and interact with Substack authors. The more publishers rely on the app instead of email as the basis of their relationship with their readers, the harder it will be for them to move their newsletters off of Substack’s platform.

Direct messages aren’t about giving you a better way to connect with your readers. They’re about shifting your relationship with your readers into a closed system so you’re less likely to flee to platforms that don’t take one dollar out of every ten you earn.

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