The practical reason it wasn't overturned is that it wasn't appealed (IIRC, they reached a settlement). Had there been an appeal, it's possible the court would have recognized that exercising some editorial control over third-party content doesn't make you into a newspaper-like publisher. They might have set the bar some place like "actual knowledge of the content, pre-publication". That might have created a precedent where there was something resembling distributor liability - where a platform wouldn't be liable unless they were put on notice and failed to take down defamatory speech.

That would still be a problem (because it would allow companies to censor critics, even if the criticism wasn't actually defamatory), but at least we wouldn't have incoherent arguments about a non-existent publisher/platform dichotomy.

That city-journal piece is pretty awful. For instance, regarding the bit you quoted, they absolutely can claim that 230 protects free speech. Private censorship on private property is free speech.

Congress almost certainly can't pass a law that outlaws viewpoint discrimination for web sites that would survive 1A scrutiny. Fiddling with defamation liability to get around the constitution might work, but just because you can doesn't mean you should.