Google Could Be Significantly Impacted By Changes To Section 230

Summary

• Section 230 is arguably a law that has nurtured the growth of Google.
• The U.S. government's legislative and judicial branches are voicing opinions to reform or re-interpret the law.
• Because any changes to the current status quo can be detrimental to Google, investors should be aware of the impending potential risk.

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Introduction

The Internet as we know it today arguably started in 1996. It is true that technological innovation has fueled the connectivity and information technology boom. Still, behind all of this, there is a piece of law that has shaped and molded the internet's growth throughout the past two decades. It has ensured modern internet platform companies grow in an exponential way with limited liabilities. To quote Congressional Research Service, the influential law is "Section 230 of the Communications Decency Act of 1934, enacted as part of the Communications Decency Act of 1996," which "provides limited federal immunity to providers and users of interactive computer services." Simply put, the providers of internet services are not held liable for third-party content on their platform. With internet providers not liable for the content within their platform, internet platform companies such as Google (NASDAQ:GOOG) have significantly benefited, shaping their current business model. However, today, Section 230 is at risk of significant reform as not only the executive and legislative branch of the U.S. government seeks reform, but also the Supreme Court of the United States, SCOTUS, is set to hear a case, Gonzalez v Google LLC, in February of 2023 to make a decision if Section 230 is still lawful today. Therefore, investors should be aware of fundamental risks that are potentially impending for Google. A fundamental risk that can change Google's business model. Based on this current Supreme Court case, it may be premature to decide if Google is a sell or buy, but I believe it is imperative that investors understand the brewing risk.

Section 230

Diving deeper into Section 230, Congressional Research Service says the following:

Two provisions of Section 230 are the primary framework for this immunity. First, Section 230(C)(1) specifies that service providers and users may not "be treated as the publisher or speaker of any information provided by another information content provider.

Second, Section 230(C)(2) states that service providers and users may not be held liable for voluntarily acting in good faith to restrict access to "obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable" material."

By Section 230, all controversial material and objectionable content posted on platforms like Google by content creators or advertisers are not the responsibility of Google. This means that Google is not liable for YouTubers posting false information or website bloggers posting controversial topics. Further, Google is also not liable for advertisers who spread false news, products, etc. even if Google's algorithm directs its users to provocative content or advertisements. Therefore, I believe any reforms deteriorating the shield of Section 230 can be detrimental to Google.

I will talk deeply about what this all means for Google after explaining why I believe reforms to Section 230 is more likely than ever before, but simply put, while Google faces increasing lawsuits, Google will likely have to spend more on policing its content and re-tooling its algorithm to connect its users to less provocative content potentially impacting the comment sections of the internet. For example, depending on the interpretation of Section 230, Google could be deemed liable for the comment sections in its YouTube content as the algorithm behind which comment gets the most exposure, like all other contents, are ambiguous.

Democratic and Republican Party Views

Starting with the views of the both Democratic and Republican Parties, both parties agree that some levels of reform are necessary for Section 230.

Republic Party, in its 2023 agenda, pointed out that its goal is to reform Section 230. Regarding this matter, Republic Leader Cathy McMorris Rodgers says the following to Big Tech Companies.

You've broken my trust. Yes, because you've failed to promote the battle of ideas and free speech. Yes, because you censor political viewpoints you disagree with. Those polarizing actions matter for democracy.

As seen in this quote, the Republican Party wants to make internet providers liable for their algorithms and censoring stripping away Section 230(C)(2), the right to police their platform in good faith. It is not for the individual private corporation to decide what is wrong or right as they could be biased. Thus, they should be liable for their content and algorithm.

The Democratic Party also agrees that reform is necessary but in a slightly different manner. While Republicans argued for accountability and less policing, Democrats argue for accountability and more policing to make the internet safer. For example, by making internet providers responsible for policing all of their content, they will be held liable for content including but not limited to misinformation and unlawful content. The Eliminating Abusive and Rampant Neglect of Interactive Technologies Act of 2022 sponsored by Representative Sylvia Garcia (D-Texas) with 23 co-sponsors says the following.

bill limits the liability protections of interactive computer service providers with respect to claims alleging violations of child sexual exploitation laws.

The commission must develop best practices for interactive computer services providers (e.g., Facebook and Twitter) to prevent, reduce, and respond to the online sexual exploitation of children.

Despite different views, one thing is common. Both parties call for a reform that will strip away legal protection companies as Google enjoys. With increasing pressure from lawmakers, the likelihood of a Section 230 reform, in my opinion, is exponentially increasing.

It can be pointed out that while both the Democratic and Republican Parties agreed on the need for a change in Section 230, it has not come to fruition in recent years. I believe this is the result of a lack of bipartisan agreement on how reform should be implemented.

However, today, I believe things will be different. There will likely not be a bipartisan agreement as the process will be lengthy, especially in the divided Congress, but with Supreme Court in the picture, the timeline for reform could be dramatically shortened.

Supreme Court

On February 21, 2023, SCOTUS, for the first time, is set to hear a case, Gonzalez v Google LLC, regarding Section 230. Supreme Court's interpretation of Section 230 could immediately create liability risks for Google while creating a strong foundation for Congress to act upon.

So, what is Gonzalez v Google LLC? It is a case that questions Google' 's liabilities in amplifying terrorist organization content directly challenging Section 201(C)(1). Allegedly, Google has radicalized ISIS supporters to carry out a pre-planned terrorist attack in Paris in 2015 killing Nohemi Gonzalez, American Citizen, and others. In doing so, Google has allegedly promoted terrorist content through its targeted recommendation, which was "critical to the growth and activity of ISIS.

Regarding this matter, Supreme Court has yet to make a decision, but the judges in the 9th District Circuit Court have published an opinion on the matter. The opinion reads:

The Gonzalez plaintiffs' claims were notcategorically excluded from the reach of § 230 immunity

In Part III.F of its opinion, the panel held that § 230 did not bar the Gonzalez plaintiffs' claims premised on the allegation that because it shared advertising revenue with ISIS, Google should be held directly liable for providing material support to ISIS and secondarily liable for providing substantial assistance to ISIS.

Judge Berzon concurred in the majority opinion in full. She wrote separately to explain that, although the panel was bound by Ninth Circuit precedent compelling the outcome in this case, she joined the growing chorus of voices calling for a more limited reading of the scope of § 230 immunity. Judge Berzon urged the court to reconsider its precedent enbanc to the extent that it holds that § 230 immunity extends to the use of machine-learning algorithms to recommend content and connections to users.

Supreme court can directly interpret Section 230 differently than the current status quo immediately changing the picture and creating a solid foundation for Congress to further act upon.

Risk to Google

Given the above evidence, I believe it is highly likely for the Supreme Court to introduce some levels of change to Section 230 whether it is a more narrow interpretation of the law or setting a foundation for the legislative branch to reform it. Thus, I view the current events unfolding surrounding Section 230 to pose a significant risk to Google.

Any changes to Section 230 will mean that Google's liabilities regarding third-party content will exponentially increase as the company can be liable for anything ranging from advertisers to YouTubers to Bloggers. Therefore, the company will be likely to enforce stricter content moderation creating a potential void in the supply of provocative content that garners the most attention.

Looking directly at numbers, Google's advertising revenue was responsible for about 81.3% of the company's total revenue while the advertising business was the only business that generated an operating income. It is true that Google is attempting to diversify its business to the likes of the cloud, but as of today, any damage to how the company operates its digital advertising business will inevitably be detrimental to the company's top and bottom lines.

To give a few examples regarding the potential liability Google might face if there are any changes to Section 230, we can look at past Facebook, currently called Meta (META), scandals. In 2016, the online advertiser faced criticism for 2016 election misinformation where false news outperformed real news. This scandal shows not only how lucrative the provocative contents are, but also the potential liability for Google surrounding misinformation as any third-party content in any of its platforms could be subject to legal action.

Therefore, it is my view that Google will inevitably see significant disruptions to its business model if there are any changes to Section 230.

Action

Despite the current magnitude of the current situation surrounding Section 230 and Google, I do not believe a sell rating on Google's stock is valid today. While the potential risk is catastrophic, there are still many uncertainties today.

First, as mentioned in the risk to thesis section below, political actions and Supreme Court decisions are often unpredictable and could take months or even years to unfold. Taking action solely based on the development surrounding Section 230 may be premature.

Second, Google, disregarding the Section 230 risk, is expected to perform well in 2023. After a brutal 2022 of a slow digital advertising market, the market's normalcy of growth is expected to start returning in 2023. The digital advertising market is highly correlated to the general economy, and the IMF, International Monetary Fund, has revised the 2023 global growth expectation upward to 2.9% from 2.7%. Further, according to Yahoo Finance's analyst expectations, Google's eps is expected to see a growth of about 12% after a slow 2022.

Risk to Thesis

While any changes or re-interpretation of Section 230 can be detrimental to Google, there are no guarantees that these events will unfold. Even given the current political situation supporting the claim of an impending change in Section 230, political actions of the legislative branch can be time-consuming and often unpredictable. Further, with only the opinion of the district court, the Supreme Court's view of the subject matter can be vastly different potentially creating an error in my current thesis.

Conclusion

Supreme Court is expected to hear the current case in late February of 2023, but it may be too early to act as the final decision will likely take many months. Thus, it may not be optimal today for investors to buy or sell looking at just this information; however, given the magnitude of the situation, I believe it is imperative for all investors to be aware of this impending potential risk to accurately gauge and act upon the factual information when the time comes. I will continue to cover this ongoing Supreme Court case, but until further development, I believe Google is a hold.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.