Big tech’s hands-off era is over
Amazon, Google, Facebook have to be proactive about managing their platforms. But it will be costly
Internet giants for years have had their cake and eaten it too. Now a bittersweet tab is coming. The question is, who pays?
Companies like Amazon and Facebook have made worldchanging fortunes by creating virtually ubiquitous online platforms used for shopping, services and information. But the bulk of the content and products supplied for those platforms doesn’t come from the companies themselves. This has historically provided a nice defense when things go awry. After all, if the owner of a flea market isn’t responsible for that fake Rolex you bought at one of its stalls, why should Amazon be responsible for the stuff its customers choose to buy from independent merchants through its site?
Except Amazon is no flea market. It is currently the third most highly valued company in the world, behind only Microsoft and Apple. It is also on track to become the third-largest company by annual revenue on the S&P 500 roster by the end of this year, likely surpassing both Apple and ExxonMobil. Add in Facebook and Google-parent Alphabet Inc., and you have platforms generating more than $460 billion (U.S.) in combined annual revenue.
Over the years, these growing companies have successfully skirted legal recourse for bad actors on their sites. They have had the law on their side: Section 230 of the Communications Decency Act of 1996 shields Internet platforms from liability for what others post.
Now, as global behemoths, it seems that with greater power comes greater legal responsibility. The U.S. Court of Appeals for the Third Circuit earlier this year held that a customer in Pennsylvania could sue Amazon over a product that was allegedly unsafe. Meanwhile, Facebook was recently fined $5 billion over privacy violations— the largest privacy-related fine in the history of the Federal Trade Commission. Google was also just hit with a $170 million FTC fine over its YouTube operation, for which the company made changes such as disabling comments on children’s videos.
The problem is one of expectations. Online consumers on established platforms reasonably expect to find goods and services that are both safe and as advertised—much as they would at big-box retailers. And they don’t just expect it of the largest companies. Consumers believe they’re entitled to the same from smaller, more specialized players focused on categories such as dating, travel and childcare.
The “we are just a tech platform” excuse is no longer cutting it. Facebook has been investing aggressively this year to bolster safety on its platform, including on its Marketplace, where earlier this month The Wall Street Journal found disguised gun sales, despite a ban. The company has spent the better part of the last two years getting lashed by regulators, lawmakers and the press over disputes that can mostly be boiled down to the legitimacy of content posted on its site.
Now it is Amazon’s turn. A Wall Street Journal investigation last month found thousands of unsafe items listed on Amazon.com, mostly from third-party merchants. Amazon says it has tools in place that have worked to block 3 billion listings last year alone. But the company will likely have to do more, given the increased scrutiny it now draws.
Smaller platforms are paying, too. Another Wall Street Journal investigation earlier this year revealed several incidences of tragic outcomes for parents who used Care.com to source childcare. The company’s chief executive stepped down just months after The Wall Street Journal’s initial story, and an activist investor is now calling for a possible sale of the company. The company said in May it would add indepth background checks and other screening procedures for caregivers.
Improving the safety of online platforms is paramount. Care.com is now down 57% since The Wall Street Journal published the results of its investigation in March.
The company said last month the news contributed to a slowing in paid member growth. Revelations of bad actors and harmful products could chip away at consumer confidence in the platform model itself, threatening growth for all these companies.
Thus far, investments in added security have been largely borne by the platform companies. And while much of that expense will likely come from investors’ pockets, customers could get stuck with some of the bill. In Amazon’s case, the etailing business offers much thinner profits than that of online advertising, leaving less cushion to absorb higher costs. Amazon’s operating margin of 6% over the last four quarters pales next to 34% for Facebook and 26% for the core Google business. More stringent quality control could deprive customers of some apparent bargains, driving them back into the arms of traditional retailers.
Prepare for a margin squeeze at tech platform companies.