Section 230: Good for Competition Online
How Section 230 Helps the Little Guy Compete Against Big Tech
Most people know that Section 230 of the Communication Decency Act is one of the key laws underpinning online expression and content moderation. But Section 230 is also a key way of making it easier for the little guy to compete against Big Tech incumbents.
Tim Wu, Special Assistant to President Biden for Technology and Competition Policy — and a driving force behind Biden’s 2021 competition executive order — wrote a few years ago that:
“Repeal of 230 would also probably hurt smaller platforms or startups more than the larger ones — say, a small-town newspaper’s comment section, or a startup challenger to Facebook. The big platforms have the resources to pay for all the screeners to take stuff down before they get sued, but startups don’t. A few nasty lawsuits could kill them. In this way Section 230 repeal might even further insulate the big platforms from smaller competitors”.
Let’s take a closer look at three ways that Section 230 works to help smaller companies compete.
Section 230 helps make sure upstart services aren’t disadvantaged by costly lawsuits
A recent report by my Chamber of Progress colleague Elizabeth Banker highlighted how Section 230 has allowed small platforms to continue to maintain their services even while facing ongoing litigation by providing them confidence in a positive outcome — making it easier to resist litigation threats.
Litigation costs, even when the underlying lawsuits are dismissed as frivolous, can be substantial, with most defendants unable to recoup the entire cost of their defense. Small companies are more likely to be crippled by the cost of litigation than bigger companies, with research showing that the legal liability from lawsuits for companies with less than $1 million in revenue is 10 times higher proportionately than for companies with over $50 million in revenue.
This means that in addition to having the cash reserves to defend lawsuits, the impact on business operations including the ability to hire and retain staff is less acute for big companies than for small ones.
Section 230 therefore helps small companies by ending lawsuits early and limiting the costs of litigation. Elizabeth’s report notes that most defendants, even in the case of frivolous or meritless lawsuits, never recoup the entire amount they spend on their defense. The “procedural fast lane” offered under Section 230 therefore protects small platforms by limiting the money, resources and time they are forced to divert from business operations onto lawsuits.
Without this protection, smaller platforms trying to stay in business may be forced to preemptively censor content on their platforms by removing user generated or third party content in order to avoid litigation costs. This will lead to worse consumer experiences on such platforms and ultimately increase the market share and domination of a few big companies.
Section 230 eliminates the need for startups to hire armies of content reviewers
A repeal of Section 230 would likely create an obligation for companies to review and moderate all content on their platforms by removing their protection from being treated as “publisher or speaker of any information provided by another content provider.” Without Section 230, online platforms will have to hire teams of reviewers and moderators to review every single piece of third-party content before it is published.
Large companies and platforms which have the financial resources to hire thousands of employees, or develop and deploy automated moderation systems that can review and/or filter content before it is published will be able to continue operating while small platforms will experience significant obstacles providing services in a manner that will not expose them to litigation risks.
The cost of content moderation remains high, with human content moderation often requiring the employment of thousands of employees. It is estimated that there were about 15,000 content moderators directly or indirectly employed by Facebook in 2021.
This represents significant and resource investments for new companies hoping to compete effectively with established incumbents leading to an increase in operating costs for new entrants into the market which they are likely to be unable to absorb.
Engine, a non-profit tech policy organization reported following a survey, that:
“for most startups…, moderation is conducted by humans, on an as-needed, case-by-case basis. Startups spend tens, or even hundreds, of thousands of dollars on content moderation technology”. However, most of the companies surveyed “did not use technology as part of their moderation processes, because moderation technologies were unwarranted due to scale, were prohibitively expensive, and are ultimately imperfect, requiring human review as a backstop”.
In the last year, we have seen the establishment of several social media platforms launched to provide alternative means of collaboration, communication and engagement to various social groups such as Parler, Truth Social or Gettr.
These platforms will most likely not have successfully launched and remained in business or would have been prohibited from providing users opportunities to share content if there had been the significant burden of having to review all content before publication to avoid litigation or liability.
Section 230 helps keep startups afloat
Research has shown a strong correlation between protection against liability for digital or online intermediaries and the success rate of startups, with investors more likely to provide significantly higher investments in companies protected from liability.
In 2019, research by the Copia Institute and NetChoice in 2019 found that industry sectors that did not have the protection of Section 230 were more likely to have higher shut down rates and lower rates of successful exits (i.e. acquisition of companies at prices higher than they had raised from investors) than sectors that were protected.
One such industry is the digital music industry, where copyright issues often form the basis of litigation and dispute. Section 512 of the Digital Millennium Copyright Act (DMCA) provides limited protection for digital music platforms in respect of third-party content without the procedural fast track protection found in Section 230.
As a result of the limited protection provided by the DMCA, litigation cases brought against digital music platforms can often be drawn out and expensive, with companies unable to recover all their costs even when they win the case. Startups in this space are therefore found to be significantly less successful than startups in the social media sector with a reported successful exit rate of less than 8% in the digital music sector, compared to a 28% exit rate in the social media sector.
In contrast, Section 230 encourages successful innovation and entrepreneurship. Companies that rely on the protection of Section 230 were also found to have a lower shut down rate than companies relying on the DMCA.
Although critics have taken to arguing that the protections afforded by Section 230 have made the internet a worse place, it’s been an under-appreciated contributor to a competitive online ecosystem. Politicians such as Senator Lindsay Graham have stated that ‘Big Tech’ are the only companies with absolute immunity from being sued for their actions thanks to the protection of Section 230.
In fact, Section 230 has provided protection for small businesses and startups looking to challenge and compete with these large platforms. Those who are concerned about the size or power of the large social media platforms should view Section 230 as a key tool to encourage innovation and competition and be concerned with protecting it.
The Chamber of Progress (progresschamber.org) is a new center-left tech industry policy coalition promoting technology’s progressive future. We work to ensure that all Americans benefit from technological leaps, and that the tech industry operates responsibly and fairly.
Our work is supported by our corporate partners, but our partners do not sit on our board of directors and do not have a vote on or veto over our positions. We do not speak for individual partner companies and remain true to our stated principles even when our partners disagree.
