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Last week,
introduced a new and exciting product feature: Notes.
For the uninitiated, Substack started as a newsletter distribution and tooling platform, and has begun to “land and expand” in its quest to make seamless all aspects of connecting creators with each other and their audiences. Its introduction of the Notes feature is significant as the platform’s first foray into short-form content. Notes allow writers and readers to interact in a more bite-sized fashion, sharing links, quotes, and snippets from various Substacks as well as other sources. Where Substack has traditionally been a location for the worlds’ most interesting writers to publish long-form works, with newly added functionality for video/audio content as well, it has now amassed a large and differentiated enough user base that the company has clearly set its sights on loftier aims: building the world’s best creator network.
Now, to the internet native of you, this feature may look awfully familiar…
The dropping of this feature in conjunction with Substack’s growing importance in terms of both cultural relevance and social networking power has elicited the ire of Twitter, and led to an interesting competitive interplay between the two.
Twitter, the Incumbent
Twitter has long been the king of short-form content on the internet (historically, 140-character notes), and the platform was quick to respond with the kind of flippant knee-jerk pettiness that has come to characterize the organization’s strategic actions under Tsar Musk:
First, Twitter moved to summarily block all links out to Substack that were posted in Twitter feeds, disallowing both retweets and likes on such posts. This is significant when considering the overlap of power users between these two platforms. Substack has been defined by its ability to attract, retain, and reward the most interesting writers on the internet. Where many authors leverage Substack for the distribution of their long-form content (deep dive analysis, heady thinkpieces, discussions of crabs, etc.), that same type of text-preferring user also tends to be highly active on Twitter as well, often utilizing the latter platform as a funnel to drive users over to their more easily monetizable content elsewhere.
As an aside, Twitter’s always had a bit of a challenge with monetization for both creators and advertisers (hence the company’s lackluster stock performance vs. other social media players, and subsequent acquisition). Historically, it’s been tough for a creator to really monetize directly from a following on Twitter alone. Thus, many have used it as their distribution channel to drive followers to other platforms/products/offerings.
Second, Twitter fired back with a forthcoming subscription option for creators on its platform, essentially mimicking Substack’s monetization model (which we’ll unpack later):
The second Tweet is particularly interesting when compared to Substack’s take rate, which is 10% of writers’ subscription income:
At first glance, Elon’s essentially matching Substack’s model with a decent advantage for web-based subscriptions (though, I imagine Twitter’s user base is largely mobile-based, which is another interesting comparison vs. Substack’s which is likely largely browser-based). It would not surprise me if Twitter attempts a war of attrition, taking a loss to reward creators above and beyond its competition in a bid to retain its relevance and box out smaller rivals with smaller balance sheets.
For this feature announcement itself, the optimist in me would like to give Twitter the benefit of the doubt and assume that such product development had been occurring behind closed doors for months now as the embattled platform has pursued profitability… But, given the nature of its product roll outs thus far under Elon, I think that it’s equally likely to have been barked down the chain of command upon hearing Substack’s announcement, and now has a team of 20 year old devs working around the clock to ship it. There’s some evidence to back this theory up, given the flood of comments voicing the inability to access the feature at announcement.
But why the smackdown now?
Musk purchased Twitter at an (arguably) exorbitant $44B valuation last October, and by all accounts has torched a significant amount of the brand equity/enterprise value that it had prior to his stint at the helm. Estimates of its current valuation vary widely, given the illiquid nature of a private company, but definitive indicators include Fidelity’s >60% markdown on its investment in the deal. This entire thing is further complicated when considering the debt used in the acquisition:
Considering that the LTV (Loan-to-Value) at close was in the ballpark of 30%, and now potentially exceeds an alarming 65%+, the incentive for Musk to right the ship, show growth to both his shareholders and creditors, and turn a profit is massive.
And this is speaking in only financial engineering terms, to say little of the reported flight of advertisers from Twitter, the bread and butter revenue stream for most social media platforms. Per NPR, (with whom Musk also recently beefed), Twitter had lost 50 of its top 100 advertisers around late last year.
So, Twitter’s had massive declines in top line revenue driving an implosion in equity value beginning to rub up against a significant debt load (which likely has covenants to maintain certain leverage/cash coverage ratios). Granted, concurrent to all these actions, Twitter has reduced headcount by around 80%, which has obviously reduced cash burn massively. Nonetheless, even after reducing both expenses and revenues, this is all occurring in a maybe, maybe breakeven business (per Musk).
These are the broad strokes that set the scene for Elon’s breakneck race to profitability, which has included sourcing new revenue streams by any means necessary. With pressure on its traditional business model, which revolves around monetization driven by advertiser spend for targeted high-fidelity data of its users, the company has begun to consider alternative ways of extracting value from its uniquely situated position as the ‘townhall of the internet’.
An obvious answer has been to extract value from the users directly (vs. derivative monetization for their attention), which first began with the democratization of the coveted Blue Check Mark prior to these most recent announcements.
For context, the Blue Check on Twitter had long been a stamp of internet notoriety. It was originally utilized by the platform to designate verified users, brands, or organizations in order to help audiences discern between fake accounts and real ones. Aside from legitimate business and journalistic use cases though, the Check also came to socially represent an internet rite of passage for blossoming influencers/threadbois/tech bros who had achieved a certain level of notoriety.
In a clever bid for early cash flow, Musk reversed this legacy system and allowed anyone willing to foot the bill to receive the previously elusive Blue Check:
It’s unclear the extent to which this has staunched the (cash flow) bleeding, but I think it was a great move to get early, high margin cash in the door as they build out additional benefits for the Check itself, which currently offers consumers little more than increased visibility and marginally fewer ads on one’s feed. Note, Twitter Blue for Business does pack more of a punch (at a more taxing $1,000/mo. price point) with organization-specific tags that allow businesses to designate their members. The business angle is interesting for allowing more decentralized self-policing by brands, as the impetus is on the company/organization to keep their affiliates current (ex: if an NBA player leaves the team, the social media intern will need to remove said players’ Twitter badge).
Refashioning the Check from a conveyer of legitimacy to a purchase point for content distribution has been an interesting move for Twitter, and I’m excited to see what kind of additional functionality they add to that service offering. Musk suggested in its initial launch that the incoming funds from Check subscriptions could be used to reward creators on the platform. This would be a positive rejiggering of Twitter’s model and an interesting way to combat the likes of Substack’s subscription network.
Substack, the Upstart
As outlined earlier, Substack began as a platform to empower writers with seamless tooling to publish, distribute, and monetize their long-form content. More simply, it allowed writers on the internet an easier means of building their newsletters and getting compensation from their followings. The Substack team took a simple idea and executed on it so much better than the existing competition that it has gained massive traction, reaching over 2M paid subscribers with over 20M monthly active readers. What began as a tooling platform has now emerged as a curious social subscription network.
The subscription nature of Substack’s business is what particularly interests me. The model itself is relatively straight-forward: readers who adore a particular author can subscribe to their newsletter and pay $x per month, with Substack taking a small cut for facilitating the relationship. In its own right, not that interesting as a few-to-many social network:
But as the platform has grown and expanded, the team has added a number of features to drive virality and unlock increasing amounts of value for both their creators and their audiences:
Chat: allowed for a two-way relationship between authors and subscribed audience members to engage in real time, thus deepening the network aspect of the platform.
Recommendations: offered a low lift method for writers to endorse other voices that they trust and respect. It may sound elementary, but this was a major lever they pulled to drive virality. It’s been particularly effective given the differentiated nature of Substack’s trust-based social graph and incentives (discussed below).
Notes: further strengthened the network aspect of the platform as a means of increasing inter-reader relationships for audiences to engage with both the authors and each other.
These big adds have reshaped Substack’s social graph to look something like this:
They have built a bonafide social network, but with a differing incentive base from traditional competitors like Twitter. I believe that the subscription nature of the dominant relationships slightly alters incentives in a way that’s really exciting: the relationships for authors here are more trust-based in engaging their audiences and each other versus models like Twitter’s that feed off of engagement.
Twitter’s timeline rewards controversial takes and polarizing opinions to drive engagement and move one’s content up the feed’s visibility. Also, it algorithmically feeds users content based on one’s connections and actions on the platform (likes, retweets, etc.). Contrasting this with Substack’s network, the subscription model lessens both the platform and its users’ reliance on click-bait type engagement by capitalizing on the trust between authors and their audiences. A creator is incentivized to provide interesting and engaging content to their target audience, as that’s their customer base, and by extension only really recommend fellow creators that their audiences are likely to enjoy. It’s a subtle shift that urges more genuine engagement.
Substack’s been able to orthogonally attack social media, as its core business didn’t originally rely on advertising dollars to thrive. The platform is supremely aligned with its power users, as its scaling revenue is specifically driven by its most successful creators. Furthermore, the team has now brilliantly increased switching costs for its content producers (who traditionally have been free to take their work anywhere) by building a network around its platform.
Conclusion
For either company, victory in this emerging skirmish is far from assured. Substack has made its name as a platform empowering the individual and championing free speech for its users, with much of its value proposition reliant on this continuing. Although Elon has similarly given these ideas lip service, the extent to which they actually come to fruition on Twitter is yet to be seen. His mercurial management style has made it hard to predict the future of Twitter’s place in public discourse, and has certainly opened up a wedge for competitors beyond just Substack. Twitter’s antagonistic undermining of legitimate legacy media companies (see: the ongoing “state-funded media” debacle) and erratic spooking of advertisers has definitely weakened its position in the market. But the SpacEx/Tesla fan in me must concede that these moves may be creating space for a phoenix to emerge, as the company’s massively slashed costs should invigorate the business with significant operating leverage if they can reignite their top line. All this to say that the battle between Twitter and Substack is far from over and should ultimately result in more value flowing to creators, regardless of the outcome.
Thanks for letting me contribute to the war for your attention.
- W
P.S. I want to give a specific shoutout to
from The Generalist for his incredible deep dive on Substack: An Empire of Narratives. It inspired many of the thoughts here, and I pulled a few of my stats and graphs from his work. He’s a brilliant writer and his analysis there is far more insightful than my drivel, for those of you with additional interest.An Artistic Addendum
A fun little cultural note, the democratization of the Check as a previously esteemed social signal begged some interesting philosophical questions around status, verification, and legitimacy within our social networks. This led to the launch of a fascinating art project, Checks by Jack Butcher. The premise is a bit much the outline here, but it’s a gamified, interactive art project exploring the competing desires of status and aesthetic value within the pieces, all centered around the Check graphic. It also resulted in an entire wave of derivative pieces centered around this iconic emblem:
