07 October 2022 |

The Ponzi Platform

By Adam Ryan

Recently there’s been a ton of talk about newsletter growth on platforms like Substack and beehiiv. There have been articles like “Substack figures it out” and coverage around their investment in growth. 

And there’s a real reason to believe that Substack has figured it out. 

When I recently read Packy McCormick’s newsletter, I noticed he mentioned his newsletter grew by more than 9,000 subscribers since the last send. I’m an avid reader of his content and realized this was about 8X more than he usually adds weekly.

I asked Packy what the deal was. He said, “Substack referrals doing work I guess!”

I’m not sure how much Packy charges for sponsoring his newsletter, but I think it’s at least $200 CPM. Assuming normal subscriber engagement and 100 sends a year, the ARPU for Packy’s subscribers is at least $15. 

$15 ARPU * 8,000 new subscribers from Substack = $120,000 of value

Yes, in one week (using these same assumptions), Substack provided Packy $120,000 worth of growth. It’s mind-blowing. 

This could be a life-changing feature for writers. This solves the “creator middle-class problem” that has existed for so long. This is a platform providing more value than it captures.

Or is it?

Let’s explain Substack Recommendations 

If you’re writing a newsletter on Substack you can opt-in to “recommend other newsletters”. Then when someone subscribes to your newsletter, they can be recommended to subscribe to other newsletters.

The only catch – as a writer if you want to be recommended you have to recommend others. It’s a give/take situation.

Recommendations do a few unique things. They utilize the writer’s taste as the filter rather than some poorly built AI for recommendations. I love this. 

I want to know what Packy reads. I want to know his recommendations. It makes me more likely actually to read the content.

For writers, it’s a huge win/win. 

Recommendations provide a free way to grow, share with their audience what they are reading, and help build a community of writers supporting each other. 

For Substack, solving growth was a massive problem. As I tweeted in February of 2021: 

If they can start to tell the story of growth and discovery, then the 10% fee feels like nothing. It’s the unlock the platform NEEDS to figure out to make their economics make sense.

Substack Recommendations are the greatest feature the platform could have launched.

But as my television hero Lee Corso says, “Not so fast my friend.” 

The details of how this works matter. 

When you sign up for Packy’s newsletter, you’re immediately prompted 7… yes 7… Newsletters to sign up for. And you can do it with one click.

They have auto-checked the boxes for all of Packy’s recommendations. 

Whoever built this feature is either a total moron or hoping everyone else is a moron.

Substack’s team needed a compelling story for its writers and investors. 

I’m sure their investor update this month was pumping this “Substack’s network of writers drives more than 40% of all subscriptions across the platform and 12% of paid subscriptions.” Similar to the story in Axios. 

See, if Substack can show that they drive more than 10% of paid subscriptions, there is absolutely no reason ever to leave the platform. If they charge you 10%, but you grow 12%, then leaving is stupid. 

This is what a company that has struggled to meet investor expectations needed to figure out.

But any operator who runs newsletters businesses know, it’s not that easy.

From my experience, there is an inflection point typically of 4 newsletters in an ecosystem where it has an inverse impact. Total opens and engagement are less after one person subscribes to more than four newsletters.

The fewer someone opens, then the higher the churn of that list. 

The higher churn, the less valuable those subscribers become and the harder the deliverability becomes for your newsletter.

That is pretty much just like this person on Twitter said. 

Now, is this a bad thing for writers?

Not really, in the short term. Because they can take their list with them. Essentially it’s a way to grow the total size of your list. It’s a sexy way to say how big you’re getting and to capture short-term ad dollars in a big way.

But in the long run?

Substack has to create better mechanisms to “clean lists,” or soon the platform will have a huge portion of subscribers that are unengaged and open rates will be dismal. 

The Ponzi problem 

They have to continue piling in new subscribers to the ecosystem to make this work. 

In many ways, Substack looks a bit like a Ponzi scheme. It’s taking a new subscriber, that a writer was able to capture on their own, and then the platform gets that subscriber on as many other newsletters as possible. 

What happens when Substack writers get addicted to recommendations and simply rely on them to grow?

If they stop tweeting and doing the social hustle to grow their newsletter, there will be significantly fewer new subscribers in the ecosystem. 

With higher churn and less engagement, the ecosystem will start to dry up. The headline that made it look like Substack figured it out, will also be why their platform’s engagement will take a massive tumble. 

Recommendations were a good start, but they may have created habits both with writers and readers that end up being a net negative for the platform. 

My prediction: in the next 12 months Substack realizes the situation they’re in, and they start doing paid growth for certain newsletters to bring new subscribers into the ecosystem. They’ll still have a very leaky bucket, but that is the only way they can solve the Ponzi-like setup they’ve created.