There is a fundamental flaw in the Substack power law business model

The fundamental flaw is that sovereign writers who make it to the top of the power law can easily switch from Substack to Stripe. If you already know something about online media paywalls & data barter economics, power law & sovereign writers, Substack & Stripe, algos and attention hacking, …that is your TLDR summary. If not, read on while I break it down for you.

I am a media entrepreneur who chose to focus on one niche – Fintech. So I am qualified to write about this subject. 

Online media paywalls & data barter economics

If you increasingly hit paywalls as you look for information, you are seeing how the concentration of media power in a few behemoths like Google and Facebook is impacting all of of us. They set the price of advertising and we all give them content. 

That is why I  replace the word “content” with “information”. Content implies fodder for the behemoth’s ad beast and implies that it is not worth much. By contrast, “information” implies something valuable. 

Media behemoths like Google and Facebook get free content. As Gillian Tett at FT tells us, this is a form of barter economics; we give our data in return for free information. 

Power law & sovereign writers

I believe the term sovereign writer was coined by Ben Thompson of Strachery who certainly qualifies as a sovereign writer. My definition is that a sovereign writer is a brand in their own right that sits atop a power law graph  and does not need work for big media brand (which has to pay them well to keep them).

They can easily switch to Stripe and cut out Substack’s 10% fee.

Substack & Stripe.  

Sub-stack enables writers to sell subscriptions, taking a 10% cut for their business plus another 3% via Stripe to credit card networks.

Stripe manages credit card payments for your site. It is easy enough to use and integrates with blogging, newsletter and subscription management tools.

Substack makes their money (quite a lot, it is a successful business) from millions who individually sell very little but in aggregate sell a lot (a million writers who each make $100 per year is $10m in revenue to Substack). 

Here is the problem. Those million writers in the long tail of the power law may only make $100 per year but they aspire to make $1m per year. Substack points them to those sovereign writers. If those sovereign writers ditch Substack and use Stripe directly, Substack revenue takes two hits

• they lose the revenue of the sovereign writers who leave Substack and that can add up – 100 sovereign writers making $1m pa is the same as 1m writers making $100 pa.

• They lose some of the long tail aspiring writers who see the sovereign writers (who they aspire to be) leaving Substack.

They are trying to stem this tide with Substack Pro, by making advance payments (as much as $250,000) which they recoup by charging 15% up to a defined amount and then their take is down to 10% again).

Algos and attention hacking

So what Substack needs to do is deliver attention from people who will buy a subscription which they are trying to do with their leaderboards, but their algos will have to beat  Google and Facebook who are masters at this game.