Licence revoked?

Despite – or because – of their ubiquity, even digital market giants such as Facebook, Google and Amazon run the risk of losing their social licence.

The social licence is not simply the overall organisational legitimacy, but features a local character in that it builds on locally rooted values and norms.

This local character might induce many to think that digital markets are an exception; that digital markets are for global companies and once they know their business and have reached a critical mass of users, social issues are not a top priority. However, such a belief is dangerous and not to consider stakeholder interests as a relevant element of corporate strategy is poor advice.

In fact, social licence can be just as relevant in digital markets. What’s more, a strong discrepancy often exists between the global digital markets served and the local nature of values and norms that determine the social licence. This discrepancy can lead to a dangerous strategic blind spot. However, it would be wrong to conclude that, once digital market players identify the relevant local values and norms, they will also easily find the right strategy to gain and maintain their social licence.

The local character of values and norms can at times require the consideration of different strategic options and imply different topics in the conversation with stakeholders. In digital markets, where the company acts and is scrutinised globally, this can pose a challenge for even the most dominant companies.

Depending on the product or service that you offer, one or more of the following three topics is probably among the most relevant for your stakeholders and, therefore, your business: (1) privacy and data security, (2) your corporate social responsibility track record, and (3) freedom of speech. The following three cases illustrate how these topics can affect firms’ social licence in different digital markets.

Inactivity on security is not a viable strategy

WhatsApp is one of the most controversial apps in terms of privacy. The messenger service was one of the first applications to provide SMS-like real-time communication at no charge. This is probably why it is the second largest social network in the world today. Its one billion monthly active users are topped only by Facebook’s 1.6 billion. Considering that there are only 2.2 billion users of social networks worldwide1, this is an impressive share. After Facebook founder Mark Zuckerberg bought WhatsApp in 2014 for $19 billion, which implies each user’s data being valued at about $40, the app became even more famous. In 2015, 667 million messages were sent with WhatsApp in Germany alone2.

By installing WhatsApp on a smartphone, the app is granted access to all contacts and pictures, as well as camera, WLAN and GPS data – a walking bug in our pocket. The Electronic Frontier Foundation ranked WhatsApp last for users’ data security3. Considering this, it is not surprising that authorities in several countries have raised complaints4. These security issues are relevant not only for direct users of WhatsApp. Just by appearing in the contact list of a WhatsApp user, anybody could be the subject of the company’s eagerness to collect and retain data.

Despite years of rising pressure and concerns regarding its handling of user data, WhatsApp has remained impressively inactive. At the end of day, the app has gained a breathtaking number of users, so why should they care? One reason why WhatsApp won so many users despite the security concerns from many stakeholders is the presence of strong network externalities: once almost all your contacts use a particular service and almost none use the secure alternative, the choice is often between insecure communication or no communication at all. These network externalities are present in many digital markets since many digital businesses involve networks and/or offer platform services.

WhatsApp’s inactivity on security measures has provided an opportunity for messenger apps whose main value proposition is data security and encrypted messaging, such as Threema. A similar example is Telegram, which has doubled its amount of users over the last 14 months and can now boast over 100 million users. The open-source messenger Signal even won the endorsement of Edward Snowden.

Thus, despite the strong advantage that WhatsApp has due to strong network effects and its dominance as the fastest growing market leader, its wait-and-see strategy proved to be a latent danger. Consequently, WhatsApp recently introduced end-to-end-encryption as a standard for all users with the latest update and thus now scores better than Skype on almost every dimension of security6. However, how users’ meta-data is used remains unclear and the code is still not open for review. Considering the struggle of a player with such immense advantages, it is evident that firms in less favourable positions have to deal early on with an eroding social licence.

If internal CSR is bad, external charity looks bad

For Inc., a recurring issue impairing its social licence is the question of how closely a company may monitor its employees and how heavily it may pressure them. The “shop everything online”-business offers an apparent infinity of products, orders around the clock and immediate delivery.

There seems to be no slack scheduled, no frictions allowed, no interference tolerated. Stories of merciless working conditions for employees in packaging centers, administration and even middle to upper management are widespread. They include strict monitoring, collecting detailed performance data and using survey tools to blacken colleagues such as the “always feedback” tool. Amazon employees in Germany, for example, have been in the news with complaints concerning immense pressure and performance monitoring.

Since 2014, the German labour union Verdi has put pressure on the German subsidiary of Inc., which counts more than 12,000 employees. It does so by means of large-scale strikes that in the past disrupted Amazon’s logistics. A disaster for a company that has built its reputation on extremely fast and reliable delivery.

“The result of this cost leadership strategy is a loss of social licence which contributes to Amazon deriving very little profit from its online shopping platform.”

Of course, Amazon, like many other companies, reports actively on their corporate social responsibility activities. However, these seem not to be properly aligned with the expectations of stakeholders. It is hard to communicate charitable activities on the one hand when on the other hand you act uncharitably towards your own employees (or at least your stakeholders perceive you this way). In this case, stakeholders might consider your reporting of your good deeds as a red herring or as greenwashing. The fact that you cannot easily control conversations in social media only aggravates the matter.

Once reputation is damaged, it is hard to win back a place in the conversation. Illustrative of this is that Amazon’s transparency initiative to “tour an Amazon fulfillment center” went largely unnoticed, notwithstanding the fact that the working conditions in these centers are the main issue for many customers.

Some of the most valuable customers now prefer to support their local bookshop or choose an online shop with more convincing CSR activities and communication. The result of this cost leadership strategy is a loss of social licence which contributes to Amazon deriving very little profit from its online shopping platform.

Freedom of speech in a big data world requires coherence

Social networks and blogs fueled the upheavals in the Arab world when, in 2011 a series of protests and riots lead to the Arab Spring. Initially referred to as the ’Facebook revolution’, the role of social networks was relativised later on, just as the achievements of the revolution itself were. Nonetheless, social media platforms revealed their potential as tools of self-empowerment.

However, as much as the public praised Facebook for its role in the Arab Spring, it criticised the platform for its policy regarding hate speech, nudity, and so on, a stance perceived by many as hypocritical. A case in point is the criticism received by Facebook after its defense of free speech in the wake of the attacks on Charlie Hebdo after having removed criticism of a Pakistani actor from its platform7.

This situation is a result of contrasting pressures from different stakeholder groups and an apparently incoherent content policy. However, several issues complicate the matter: content policy is in continuous flux, new content arrives in an unimaginable quantity, and content moderation (deciding which content is offensive) is a field of social responsibility in its own right. In fact, platforms like YouTube and Facebook outsource much of their content moderation to east Asia, where many workers at these so-called ‘digital sweatshops’ suffer dramatic psychological consequences from reviewing large amounts of some of the worst media imaginable.

These examples show the power of single companies to determine what we read, share, know and think of the world. This power in itself has also received heavy criticism in the past, for example after a study that showed how Facebook could determine elections by means of digital gerrymandering8.

Although Facebook’s social licence is eroding in many areas, the demand for their services is unbroken. However, the consequence of an eroding social licence isn’t always a meaningful reduction of customers. It can also include problems for operations, for example when politics and authorities react to stakeholder pressure. In fact, both Facebook and Google have repeatedly had to face antitrust probes in Europe.

Don’t just provide information, help create meaning

The examples in this article show that even the top players in digital markets have to deal with their social licence and are not immune to stakeholder pressure. Moreover, we can conclude that every digital firm should be aware of the following three problems. The first problem is the discrepancy between businesses’ inherent complexity and opaqueness and the limitation of their stakeholders’ understanding.

“Even the top players in digital markets have to deal with their social licence.”

In the mining industry, effects on nature and environment are often large scale and unambiguous – at least in the perception of many stakeholders. Issues in digital markets, such as privacy and data security, are far more hidden, subtle and complex. It requires a sound understanding of IT, internet business models and data security. That makes it an issue for elites and insiders, with consequences of misuse known only to few. Companies must be aware that the valuable community of early adopters and opinion leaders is often led by groups and individuals with in-depth expert knowledge. Compared to most users, these few opinion leaders can make or break a company’s online reputation. For all the other customers: transparency and open handling of security-relevant topics builds trust towards an enterprise in the long run.

Executive Summary

• Social licence is relevant also in digital markets.

• Often a discrepancy exists between the global nature of digital markets and the local nature of social licence (global-local-trap of social licence).

• Strong network externalities often present in these markets might make social licence less relevant, but only temporarily.

• Greenwashing is a possible strategy to improve social licence, but might be regarded as a red herring and heavily backfire.

• In a fragmented media landscape, you need to show authentic care for and involvement in dialogue with stakeholders.

1 (April 2016)
2    VATM; Dialog Consult
5  (Februar 2016)
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Piet Hausberg

Professor Piet Hausberg holds the chair for Technology and Innovation Management at Osnabrück University. Previously, he worked as a post-doctoral researcher as the chair of management and digital markets, University of Hamburg, having received his PhD from LUISS Guido Carli University, Rome. Piet’s research focuses on R&D management and open innovation, particularly in digital markets.

Marc Suess

Marc Suess works as creative director and brand strategist for a variety of companies, agencies and start-ups from different industries. With nearly 10 years’ experience in design and advertising, he now specialises in holistic brand-communication and product- and service development.