Can Roblox beat the "pedophile hellscape" charges?
A new report calls Roblox "a pedophile hellscape for kids" while accusing the company of misleading investors. What's new here, and how insufficient was the company's response?
It looked like Roblox was in a bit of trouble yesterday morning.
That's when Hindenburg Research released an extensive report accusing the company of lying to investors about its key active user and engagement metrics, and calling it "a pedophile hellscape for kids."
It also warned that Roblox – which has never been profitable – has just about saturated the US, Canadian, and European markets that have driven its revenues and is now spending more to grow in markets where users typically spend less, raising questions about how it will ever achieve profitability.
Guess which part the financial news network CNBC cared about?
That's right, the pedophile hellscape for kids bit.
Here's a clip from CNBC's Squawk on the Street where Jim Cramer weighed in on the news.
"Numerous criminal indictments from 2019 to 2024 allege sexual predators groom children in-game, ranging from 8 to 14. Why do I point that out first? Because this was always 'the safe place'...
"This is so the opposite of what [Roblox CEO] Dave [Baszucki] has said to me over and over and over again, that it would be – if true – a major scandal. A major scandal... Roblox isn't down enough. If what Hindenburg says is true, the stock's gotta be down a lot more."
According to the on-screen ticker, Roblox stock was trading down 6.6% as Cramer said that, but trending upward after an initial plunge with the report's release.
Cramer's critical faculties are not exactly beyond reproach, but the shock he expressed on air is in itself shocking to me.
The Hindenburg report details nine different arrests of predators who used Roblox to find their victims since 2019, and links to publicly available news stories about each one.
It also links to four major media reports covering the pedophile hellscape for kids angle since 2020, from Fast Company, The Daily Mail, Rolling Stone, and Bloomberg Businessweek. It links to the National Center on Sexual Exploitation naming Roblox to its Dirty Dozen list of companies enabling and profiting from sexual abuse and exploitation.
It doesn't mention the excellent reports of People Make Games on how Roblox exploits children, or other similar compendiums of the platform's ongoing user safety failures.
This was by no means a secret, and plenty of outlets – including some in the financial press that you would imagine Cramer to pay the closest attention to –have raised alarms about this for years.
But this is all news to Cramer, a member of the press who has repeatedly interviewed Roblox's CEO and apparently just took his word for it that it was totally safe to just leave your kids there unsupervised and "grab a drink and try to relax," as Cramer's co-host David Faber put it.
But the pedophile hellscape for kids bit isn't news. It has been an obvious problem for Roblox for years, and really an obvious problem that any journalist talking to the people in charge of any online environment for kids fueled by user-generated content and social interaction should be making a major line of inquiry.
The only new light the Hindenburg report sheds on this subject comes from former employees describing a fundamental problem that online platform after online platform has utterly failed to handle responsibly.
“You’re supposed to make sure that your users are safe and but then the downside is that, if you’re limiting users’ engagement, it’s hurting your metrics. It’s hurting the [daily] active users, the time spent on the platform, and in a lot of cases, the leadership doesn’t want that.”
A damning statement, but not one that should come as a surprise to anyone.
All the things that help make an online space safe run counter to the success metrics a company like Roblox sets for itself. If growing users and engagement are your top priorities, you are not incentivized to invest in moderating and banning toxic users, cracking down on alt accounts and other ways to thwart bans, removing harmful content, creating tools or rules to prevent disordered/unhealthy play patterns, or gaining proper parental consent for collection of children's private information.
Doing all of those things properly is necessarily going to hurt user and engagement metrics, at least in the short term. A company like Roblox may not want them done properly at all, even if it were done for free. ("Properly" is the key word there. Roblox spends a bunch of money on Trust & Safety and developing AI-powered moderation tools, but clearly it's not getting the job done. More drastic, design-oriented decisions – particularly around user communications and accounts of minors – would likely be cheaper and more effective, but also more threatening to engagement metrics.)
I'm sure some companies have responsible leadership that prioritizes safety over maximizing user metrics, but they aren't the standard. Not when a company like Meta that counts one out of every three people in the world as a monthly active user learns that its platform is polarizing society, helping white supremacists organize, and fomenting genocide, but consistently chooses to sit on its hands rather than risk hurting its numbers.
So what about the Hindenburg report is new?
The big deal of the Hindenburg report as I see it is the confirmation that the company is keeping two sets of books on its key active user and engagement stats.
When it reports these stats to investors, it does so without taking out the impact of bots and people's alt accounts. In fact, it told the SEC last year that it wasn't even capable of determining if a user had multiple accounts.
But as former employees told Hindenburg, the company does have internal processes to identify alt accounts and bots, and uses those figures to guide its business decisions. A former data scientist with the company said Roblox's publicly reported DAUs would be 20% to 30% lower if the number had alt accounts taken out.
Hindenburg also hired a technical consultant to monitor more than 7,000 of the top Roblox games, and they found users spending on average about 22 minutes in Roblox games each day, well shy of the 144 minutes of average daily engagement per user that the company reported to its shareholders. And even the 22 minutes number appears to be inflated given Hindenburg identified numerous games with obvious bot accounts that played literally around the clock.
Finally, Hindenburg said that Roblox is trying to keep the company's "growth story" alive by pushing into new markets where it is spending more to acquire each user than they will return in revenue, a strategy that would make it considerably more difficult for the company to ever make its way to profitability.
Roblox's response
Much like CNBC, Roblox is treating the pedophile hellscape stuff as the biggest threat, and you can tell by its official response to the Hindenburg report.
Roblox begins by saying it "rejects the claims made in the Hindenburg Report," and then vomits up a paragraph of the usual stuff about how much the company cares about safety and civility.
Every day, tens of millions of users of all ages have safe and positive experiences on Roblox, abiding by the company’s Community Standards.
I'm sure that's absolutely true. But all it takes for that to be true is 20 million people having safe and positive experiences on a platform that – according to Roblox's last quarterly report – averages 79.5 million daily active users.
So all they're really saying is that no more than 59.5 million users are subjected to a pedophile hellscape on any given day.
It also says it has "a robust set of proactive and preventative safety measures designed to catch and prevent malicious or harmful activity on the platform," but doesn't address any of Hindenburg's criticisms, like why it had a Roblox Group with 103,000 members openly soliciting sexual favors and trading child pornography, why it doesn't place age restrictions on chatrooms, or why it doesn't require under-13 users to have parental approval to sign up.
With that non-defense out of the way, Roblox then turned to what I consider the allegations more likely to result in actual consequences for the company: lying to investors.
The financial claims made by Hindenburg are misleading. The authors are short sellers and have an agenda irrespective of the substance of Roblox’s business model and results.
The bit about Hindenburg having an agenda is absolutely true, but if we should discount parties for having a financial incentive in what happens to Roblox's share price, Roblox itself would be at the top of the list of voices to ignore.
Hindenburg put forward a pretty detailed argument that Roblox has been fudging numbers and falling short of its responsibility to keep kids on the platform safe. If the Hindenburg report is bunk, it's on Roblox to explain why at this point.
Suffice to say, Roblox did not do that.
The closest Roblox came to doing that was taking exception to Hindenburg's characterization of its daily active user tallies as misleading, pointing to the fine print in its disclosures that acknowledges bots and alt-accounts.
"Because DAUs measure account activity and an individual user may actively use our platform within a particular day on multiple accounts for which that individual registered, our DAUs are not a measure of unique individuals accessing Roblox."
That would be more convincing if Hindenburg had tried to hide this instead of putting it front and center in its report, contrasted with examples of Roblox repeatedly referring to its DAU numbers to investors as individuals, touting them by saying "An average of 36.2 million people from around the world come to Roblox every day" or "There are over 54.1 million people coming to Roblox every day."
The rest of Roblox's defense emphasized the company's bookings growth and its cash flow, neither of which Hindenburg took significant issue with. It's the sort of appeal that might convince someone who read the report and was worried that Roblox's business wouldn't be profitable, but not people who give a damn about the safety of children or care that the company might be deceiving investors about its business.
Roblox wrapped up its response by saying there is "abundant clarity" on its reporting practices in its various filings, promising to answer any remaining questions when in what is sure to be a spook-tacular earnings call on Halloween.
All in all, I think it's a pretty unconvincing response from Roblox. But it appears that investors bought it anyway.
Before the Hindenburg report released, Roblox stock was trading at about $41.35. It dropped almost 10% in the hours immediately after, but recovered to close at $40.51.
As of this writing, Roblox stock is trading for $41.75.
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