Good morning,

I’m happy to be back from vacation. A quick scheduling note about last week: there ended up not being an extra Sharp Tech episode due to the arrival of Andrew Sharp’s new son an hour before we about to record; congrats Andrew! We did record an episode that will be published later today that also covers Twitter and Substack. In addition, the planned episode of Dithering was foiled by truly terrible Wi-Fi at my hotel; we’ll be back tomorrow.

On to the update:

Substack Notes

From The Verge:

Substack is getting a new tweet-like feature called “Notes,” the company announced on Wednesday. The feature will let users publish small posts about things like “posts, quotes, comments, images, and links,” according to a blog post from Substack co-founders Chris Best, Hamish McKenzie, and Jairaj Sethi.

Notes appear in their own dedicated tab, and the feed looks pretty similar to what you might see on Twitter or other social media platforms. On individual posts, for example, you can see familiar icons for likes, replies, and reshares (which Substack will be calling “restacks”). We asked if there is a character limit for Notes, but Substack spokesperson Helen Tobin declined to share details about that.

The Notes tab also has two feeds separating “Home” and “Subscribed.” The Home feed will show content from sources across your “extended Substack network,” according to Tobin, while Subscribed will show content from “a smaller universe of sources tied to your subscriptions.”

Despite the similarities to a certain bird-themed (well, currently Doge-themed) social network, Substack’s co-founders argue that because the company’s business model is based on subscriptions, its platform offers healthier incentives to post quality content instead of things that are optimized to go viral. “Here, people get rewarded for respecting the trust and attention of their audiences,” they write. “The ultimate goal on this platform is to convert casual readers into paying subscribers.”

A Twitter-esque timeline is a natural extension of Substack’s business, for the exact same reason that Twitter buying Revue, a Substack competitor, was a natural extension of theirs. I wrote back in 2021:

What is far more important, though, is that Twitter is uniquely equipped to provide the single scarcest commodity when it comes to paid newsletters: user acquisition. This has always been the fundamental tension in the subscription model: on one hand free content is useful for acquiring new users; on the other hand if you want to run a successful subscription business you need to run it like a business, not a charity. That means having a real paywall, so that you can provide real value for the money you are charging. There are various strategies to work around this; obviously Stratechery has the free Weekly Article, but another common strategy is to leverage Twitter, whether that be composing a tweet thread about your paid article, or simply hawking the fact you have a newsletter and will you please sign up?

I argued that the possibilities for Twitter were actually even larger than simply copying Substack:

What is far more compelling, though, is Twitter remaking itself as the front-end for every subscription service in the world. Twitter is where information flows, and while the service’s userbase is relatively small, it is, in my estimation, far more likely to be willing to pay for written content than the general public (Twitter has always been the home for people driven first-and-foremost by text). How compelling would it be if, should you encounter a New York Times article on Twitter, or a Stratechery Daily Update, you were able to simply click through, thanks to your Twitter subscription? Yes, there would be a tremendous amount of details to work out as to how this would work, but what is key to note is that Twitter is perhaps the only service in the world that could pull this off, simply because it already has most of the potential customers, along with the curators they trust.

I did express significant skepticism that Twitter could pull any of this off:

One of the most famous sayings in tech goes “The battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation.” Twitter, though, is a special case: the product is distribution, and yet the company has been frustratingly incapable of actually leveraging that distribution to build anything beyond the core timeline concept from fifteen years ago. Take Direct Messages, as a particularly egregious example: Social Networking 2.0 should have been built within Twitter itself, but instead all too many direct message conversations end with the exchange of phone numbers for WhatsApp or Signal or iMessage.

That is why I am, despite my just-expressed enthusiasm for this acquisition, wary of declaring Twitter the winner of the newsletter wars. Buying a company is easy (see Vine); actually realizing that company’s potential requires vision and execution, not internal politics and indecision. Substack won’t have that problem; indeed, one of the biggest advantages startups have is the flexibility of being small and the desperation that comes from having no alternative beyond making it work.

This, needless to say, has turned out to be true; Revue went no where, and Elon Musk closed the product down. Instead it is Substack making a bid to draw audience attention away from Twitter, nominally for its authors’ sake but ultimately to help build a distribution engine of its own that will enhance its value to writers.

Twitter Blocks Substack

Again from The Verge:

Writers trying to embed tweets in their Substack stories are in for a rude surprise: after pasting a link to the site, a message pops up saying that “Twitter has unexpectedly restricted access to embedding tweets in Substack posts” and explaining that the company is working on a fix. After those reports surfaced, between Thursday night and Friday morning, Twitter apparently began to restrict promotion and visibility for tweets with links to Substack posts. New tweets linking directly to Substack.com can still be tweeted, but trying to retweet or like those tweets via Twitter’s website results in an error message saying, “Some actions on this Tweet have been disabled by Twitter,” while doing the same from within its apps or TweetDeck appears to work while failing silently.

Substack writers started using redirect URLs; Twitter marked those links (and all other Substack links) as unsafe, throwing up a scary warning to users. Any searches for “Substack” also returned results that included the word “newsletter” instead. As of this morning everything but that last one have been rolled back after Musk came under intense criticism on Twitter.

Musk certainly makes the criticism easy, particularly after talking about the importance of Twitter as a free speech platform, a principle with which Substack has been loudly aligned. At the same time, I don’t think his response should have been surprising at all; it was clear with the release of the Twitter Files that Musk believes that everything of value generated by Twitter should be consumed on Twitter. I wrote in an Update:

What does justify this approach, though, is thinking about the Twitter Files as engagement bait. It seems probable that Musk is skeptical of the value of Twitter pushing people to content off of Twitter; if Twitter is so important as connective tissue, why not capture the value directly on Twitter itself? After all, the more essential Twitter is not just in terms of links but in terms of content, the more advertisers will have no choice but to be on Twitter instead of the sites that are linked to. That, at least, seems to be the theory; I’m not sure how well it will work, but it seems in-line with the decisions made over the past weekend.

This is, needless to say, very different than the vision I painted in the Update quoted above, which was in-line with the very different vision for Twitter I had in mind when Musk announced his bid; Musk, in contrast, has consistently made decisions with a vision of Twitter as a walled garden of content. And, given that, I just don’t think that Musk’s reaction to Substack Notes should have been a surprise.

Moreover, there is relevant Twitter history here as well: Instagram built its network by ingesting Twitter’s; Twitter was heavily criticized for violating the spirit of the web — and Web 2.0 specifically — by cutting Instagram off, but my criticism as a business analyst is that Twitter took far too long to realize that Instagram was stealing their most valuable and unique asset, which was a sui generis network effect organized around interest instead of who you knew in real life.

Still, Twitter and Instagram were different: both were social networks, but photos versus text is, in my opinion, fundamentally different; Twitter and Substack, on the other hand, are very much a part of the same text-based value chain, and as is the case with any value chain on the Internet, it is discovery that is the most valuable. This by extension means that Twitter is in the most important position, and while Twitter never properly developed the hooks to extract value from its complements in the value chain, I think it is actually quite reasonable for the company to jealously defend its one remaining advantage.

Substack Versus Writers

Twitter has, as I noted above, rolled back most of the restrictions on Substack links; I do suspect that tweets with Substack links will be even more penalized under Twitter’s algorithm than tweets-with-links already were, but we may never know. Still, all of this seems like a reasonable gamble by Substack: the company is stuck at a $650 million valuation that seems wildly out of whack for a company that had $12 million in revenue in 2021, and building a Twitter replacement seems like the sort of long-shot bet that is its only chance to earn that valuation.

We know that valuation because Substack asked its writers to fund a round at the same $650 million post-money valuation it achieved in 2021, despite the fact the company failed to raise money last year; the company never released its 2022 financials.

Frankly, I think this request was shameful: Substack has rightly earned the affection of a lot of writers by providing them with a new way to earn money, and of course those writers want Substack to succeed. Keeping such a lofty valuation, though, is effectively asking for a donation from an audience that almost by definition doesn’t know any better. That doesn’t seem very writer friendly! Nor, for that matter, does this fight with Twitter. Again, I think this is a product bet that makes a lot of sense: Substack needs to take big swings if it’s ever going to reach its valuation. Writers, though, who need Twitter’s distribution, didn’t sign up for this fight; they are simply stuck in the middle.

I don’t in principle have any problem with this: as I noted on Twitter “Platform risk includes platform wars”; it’s precisely because I never wanted to be subject to the financial-driven decisions of over-valued venture-backed companies that I built my own back-end software. Substack writers implicitly accepted this risk when they went with Substack.

To that end, though, my critique of Substack is the same one I have always had: a lack of honesty, not just with writers, but themselves. I wrote in an Update last year:

I think that one of the strategic mistakes that Substack made early on was in being too publisher friendly, in two regards. The first one is that every individual publisher on Substack adds subscribers to their own Stripe account, instead of a centralized Substack account, and the second one is that Substack failed to gain permission in their publisher terms of service to create a Substack bundle.

I understand why these choices happened: I believe the Substack founders in their declared intent to put publishers first, and unbundling Stripe meant that Substack’s platform fees seemed cheaper than they might have otherwise (that 10% does not include Stripe fees); the problem, though, is that pursuing the VC model meant an inevitable conflict in terms of value capture, which meant that Substack would, in the long run, never be as favorable a deal for publishers as building the subscription stack independently. The advantage Substack had, though, was ease-of-use and, if everything went well, the ability to drive more revenue by building a drastically larger audience via a Substack bundle.

To that end — and to be clear, I’m speaking as an analyst here — I think the company should have run all subscriptions through their own Stripe account; even if publishers own their email list, it’s much tougher to leave Substack if you can’t port their subscriptions, and you have much more flexibility in terms of converting subscriptions to bundles. Secondly, I would have had permission to bundle built into the publisher agreement from the beginning. Yes, this might have cost some number of writers who care about such things, but, to be honest, I think those writers are few and far between: if anything I suspect there are more Substack authors who are annoyed at the trouble of setting up their own Stripe account than there are who would have bothered to think through the implications of not owning their own infrastructure.

Substack will never be the most publisher-friendly software: that will always be open-source. Given that, the company shouldn’t have pretended it was the most publisher-friendly, and instead leaned on its ease-of-use and potential network effects to attract writers; by trying to be something they never could be, though, they forewent their most obvious business opportunity (a Substack bundle) and risked losing their most profitable writers, only to end up putting all of their writers in the middle of a fight driven by their own ambitions, even as they asked writers to give them money at an unfair valuation.

Charlie Munger has famously said, “Show me the incentive and I will show you the outcome.” In this case, I truly believe Substack’s founders when they said they wanted to put publishers first; the incentives inherent in their fundraising and overall model, though, meant that they would violate that precept eventually. The fact they did twice in a month, in totally different ways (a platform fight and a manipulative fundraise), makes the inescapability of Munger’s precept painfully clear.

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