Note: This week you’ll forgive me from be deviating from regularly scheduled programming of proselytising value investing to talk more broadly about developments in the online media sphere. I have doubled the dose of initially promised paid articles since going live, while reducing the free articles to once a fortnight. General updates and links are well covered by others, and I’m making up for it by foraying into the world of interviewing under-followed, concentrated investors. As Lenin said "There are decades where nothing happens; and there are weeks where decades happen" - it feels like we’re in one of those moments where events are moving at a breakneck pace.
Online Media
As an investor the draw of media companies is almost irresistible. The idea that text, imagery, video, and audio can be produced once, and replicated ad infinitum is tantalising. The opportunities to profit from near zero marginal costs in replication are nearly endless. This siren’s song is reinforced by the fact that almost every form of mass media has created vast fortunes. From newspapers, to radio, to network television, cable, and finally the rise of social media, each in their turn has created a new class of media baron.
One of the unique aspects of these businesses is that they consolidate, concentrate and gate attention. Without them, all kinds of commercial enterprises become invisible to their potential customers. The result being that they can exhibit toll-collecting or royalty-like attributes. A toll well worth paying in many, many cases - just ask the early pioneers in SEO, or Facebooks Ads. For the real swash-buckling monopolists amongst us, there is pricing power too. The economic advantages are considerable.
And then there’s Twitter.
The runt of the media litter. A pygmy, deformed in it’s inability derive monopoly-like profits from the immense value it creates. This certainly hasn’t stopped investors from being drawn to it like Moth’s to a flame. It’s current proprietor is a pretty big Moth, but he’s no less susceptible to fire.
Twitter almost defies categorisation. Is it a social network? Maybe - however a large majority of users are anonymous. Is it a traditional media site? Not really, most of the important journalism is delivered off-site. It’s a million things and nothing. Ben Thompson probably described it best as the connective tissue that bridges the gap between disparate content across the old and new internet. It shuffles almost half a billion very engaged users to links, articles, videos, and online courses every day. If you’re reading this article, there’s a 54% chance you’re here because you follow me there.
The draw, initially anyway, was that it was free. The business model until very recently was brand advertising and therein lies another challenge: brand advertising is driven by large businesses looking to reach large groups of people. They weren’t interested in being associated with Trump, or porn, or the 1001 other grifters, demagogues, and charlatans leveraging Twitter for their own ends. However, one man’s grifter is another man’s saviour, and so the financial interests of the company conveniently aligned with a decidedly liberal slant at HQ.
During it’s time as a public company these revenues were never enough. They weren’t enough to make the company consistently profitable. The fact was that whatever economics were created, were decidedly handed to employees at the expense of continuing public shareholders. That all changed when Elon Musk bought the company in trademark harebrained-style.
Even now, since Mr Musk has taken the reigns, they still seem to be fumbling between new failures to capture an acceptable portion of what they create. The urgency is augmented by the rather large interest payments coming due every month. By all reports advertising revenues have plummeted amidst an employee reduction well in excess of 60%. Charging creators (seemingly at knife point - financially anyway) for the ability to be discovered has certainly garnered this writer’s $8 a month. A microcosm of this battle over value capture unfolded last weekend when Twitter temporarily began blocking Substack links, amongst other measures.
Twitter’s public rationale was that Substack had attempted to lift large amounts of Twitter user data to bootstrap their own Twitter-clone called Notes. This forum became available to me today, and I have been playing around with it with some delight.
Substack - To Notes, or Not to Notes
I have always found Substack to be alluring. It is a company that clearly illustrates, in actual dollar terms, what kind of value an online following can garner. Even better, it’s medium is most closely aligned with Twitter - the written word.
Many online personalities have gained followings on platforms like Instagram, Tik Tok, and YouTube to unusual levels of economic success. Not that many people have leveraged a Twitter following in a similar fashion. Perhaps not until very recently anyway. Edwin Dorsey, of The Bear Cave, recently shared a tweet where he showed that his newsletter (top rate stuff by the way) was generating $50,000 in monthly recurring revenue (MRR). While his success certainly isn’t typical (not by this writer’s experience anyway) it illustrates how a career can be born by posting on the bird app.
Substack’s opportunity was born by leveraging content creators largely on platforms like Twitter. It gave them a number of tools to begin writing a newsletter within minutes, instead of hours if you built your own website from scratch. Recently, Substack platform features began delivering subscribers of their own - although the most valuable subscribers still largely come from Twitter. This reliance on Social-derived traffic is a risk, and last weekend’s hamfisted episode demonstrated just that.
As I mentioned above, Notes is now largely available for subscribers and writers alike. While the early engagement buzzes, it’s striking to me that most of the discussion about it is taking place on Twitter. This belies it’s appeal as a platform in it’s own right: the nexus of this “platform” is subscribers (unusually interested readers) and writers (unusually active content creators). Twitter itself is a much more expansive platform because it caters to a large group of somewhat niche-interested users. Substack will probably end up capturing the fat tail of both distributions.
I won’t make any sweeping predictions now. From first principles, I would say that my understanding of the success of a digital media property is firstly distribution and secondly branding. Mr Thompson and Mr Dorsey have both found remarkable success due to the fact that they have become a referent in the mind of the media consuming public. While their work is of course first rate, that is probably subordinate at this point to the fact that they are their categories. This is augmented by, or perhaps even exist because, both of them have very large social media presences that allows for very efficient subscriber acquisition.
Indeed, my own modest following is no doubt why many of you, my well beloved readers, are here in the first place. I don’t foresee a world in which Twitter stops being useful to people who want to publish newsletters. While Twitter’s own newsletter product has been extremely uncharismatic - perhaps for the same reason that Substack finds Twitter problematic - it is still extremely useful for driving traffic, interest, and awareness of an online personality and offering.
This is crux of my point: for some of us, yelling into the void eventually becomes yelling into a megaphone. I keep yelling into the megaphone because the prospect of reaching more and more people is extremely valuable. I have been able to connect with a strata of society that I would have no business accessing under almost any other circumstances. It’s the possibilities and the potential for distribution that keep me, and other’s like me, posting. You can see why many of the supposed Twitter clones fail.
Notes, however, has been built into a platform which already has platform-like features, even if that platform’s customer acquisition happens elsewhere. There’s already a mass of users who won’t need to be retained because they are already there for other reasons. It’s an opportunity for Substack to be something more than just a newsletter-in-a-box solution for enthusiasts. I’m pretty excited to see where it goes.
Larry.