Roblox responds to report it attracts pedophiles and lies to investors

News Reel:

“Short seller Hindenburg Research has a new target, the company announcing a short position in the popular children’s video game roblox.”

“According to Hindenburg they are inflating some of those metrics to appease investors.”

“They allege inflated metrics, they question the platform’s safety, they say it compromises child safety.”

[Simone Del Rosario]

Last week short seller Hindenburg Research disclosed its position in Roblox, claiming the kid’s video game company is doctoring the numbers. But Hindenburg’s even more disturbing accusation is that the platform is an “X-rated pedophile hellscape.”

Edwin Dorsey:

It’s literally, to me, one of the most dangerous places on the internet for kids, and it’s advertised as one of the safest.

Simone Del Rosario:

This has long been a criticism of the game mostly played by people under age 17. Now a suicide prevention campaign is using the Hindenburg report to call on UK regulators to up their game on protecting kids from harmful online content.

Is the platform rampant with predators while at the same time, lying about its success? Let’s first look at the source.

Hindenburg Research is a short seller that publishes reports on companies that it thinks are overvalued or have bad business practices. When you publish bad news, share prices tend to fall. And who benefits when that happens? Hindenburg.

Like when Hindenburg called out electric trucking startup Nikola for using “lies and deceptions” to secure a partnership with General Motors.

The allegations included pretending a truck prototype was powered and fully functional while deceptively showing it rolling down a hill. Put this under times Hindenburg was right. Nikola’s founder Trevor Milton was sentenced to four years in prison for deceiving investors who lost hundreds of thousands of dollars.

On the day Hindenburg published its report, Roblox stock opened down 9% from the previous close. The share price bounced back by the next day.

Michael Pachter:
Hindenburg, who has had tremendous success and been right at least half a dozen times.

And I am not suggesting that they’re wrong

and I can just say Roblox is not a fraud.

Simone Del Rosario:

Roblox doesn’t fit into a normal video game bucket. It’s not a one-time purchase like a Triple-A game and it’s not a subscription for playtime like World of Warcraft.

Michael Pachter:
So they have a software platform. Think of it like iOS as a platform, and anybody can build a game for that platform.

I’m Michael Pachter, I’m a research analyst at wedbush securities, and I cover the broader media and entertainment space. So among my coverage is video games and movie streaming and some other interesting entertainment stuff.

Simone Del Rosario:

ROBLOX launched back in 2006 as a new type of educational software platform. Kids could make their own games using provided assets and even learn to code.

Michael Pachter:

And while you’re on the platform, you can wander from game to game. You can play the games. You can customize your appearance.

And you can interact with your friends. You can interact with brands, so you can go into the Nike portal or the Burberry portal, or you can play games.

Simone Del Rosario:

Roblox exploded in popularity during the COVID-19 pandemic and went public in 2021. The company boasts 79.5 million daily active users. And it’s available pretty much everywhere you play games, from consoles to mobile devices.

Here’s how they make money.

Michael Pachter:

the developers who build games for the Roblox experience publish their games on that platform. ROBLOX helps the developer to promote the game

And while in the experience, there’s stuff to spend money on. The currency in the game is called robux. So like B, U, C, K, s, but it’s B u x, you buy robux to buy stuff in the games.

you might like say, play the game, adopt me. If you want a leash, you have to buy it. You know, to take your pet out. Or if you need food to feed your pet, you’ll buy it with robux.

So the model for Roblox is we will allow you to put your game on the platform, and we will allow you to monetize. And if people spend robux in your game, you get your share of those dollars spent. We’ll collect the dollars and we’ll keep somewhere between 30 and 70% of the revenue generated goes to Roblox, depending on who drives traffic to the game.

Simone Del Rosario:

And it’s generated a lot of money. In 2023, Roblox reported $3.5 billion dollars in bookings. And in the first 6 months of this year, they’ve grown 20%, on track for $4.2 billion this year.

As we’ve said, more than half of Roblox users are under the age of 17. Kids under 13 account for 42% of the user base. That’s why the child safety part of Hindenburg’s report is so important. We’re going to get there.

But first, the numbers. Hindenburg claims Roblox is “lying to investors, regulators, and advertisers about the number of ‘people’ on its platform, inflating the key metric by 25-42%+.”

Not only that, they also say Roblox is lying about engagement. Roblox says the average player spends 2.4 hours on the platform each day. Hindenburg says “engagement hours, another key metric, is inflated by an estimated 100%+.” But Pachter says there’s a big flaw in Hindenburg’s calculations.

Michael Pachter:

Roblox says 60 billion hours, 68 million da use, 2.4 hours a day. So Hindenburg goes, we’re going to hire a technical consultant who’s going to test this. 30 million accounts, God bless them, like valid and they concluded that the game play is 22 minutes a day, and they tracked across all games. They did, they did it right? And so they went, 22 minutes is not 2.4 hours. 2.4 hours is 144 minutes, right, which is like six plus times as much. And then footnote, we did not track time spent in in other activities like customizing avatars or talking to friends.

It’s just idiotic, like when you’re in Roblox, the first thing that happens is your friends list loads, and you see all the messages from your friends, and they’re like, Hey, we’re playing this game. Come over and play with us or whatever, right? It’s idiotic not to measure that.

Simone Del Rosario:

They also get into the weeds on what a Daily Active User truly is, claiming they are measuring people simply visiting the platform, which could include alt accounts and dreaded bots.

Michael Pachter:

they never questioned bookings, which is cash, revenue, cash receipts. They’ve never questioned that. It was 2.8 billion, then 3.5 billion, and it’s tracking to 4.2 this year. So bookings are going up. Cash is going up. They did question the number of users. And if we were to restate what Roblox reported last year, 3.5 billion from 68 million users and used what Hindenburg says the right number is, then the average user, instead of generating $50 a year, generated 70 do we care?

So I think Hindenberg is making a mountain out of a molehill on users.

Simone Del Rosario:

In its defense, Roblox pointed to the elephant in the room when it comes to Hindenburg’s report.

In a statement, the company said, “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.”

Edwin Dorsey:

What matters to investors is revenue and cash flows and the revenue growth, and you know, whether or not you have as many users you claim, or 20% fewer is kind of, to me, a little bit of noise.

I’m Edwin Dorsey. I’m author of the bear cave newsletter, a newsletter focused on exposing corporate misconduct,

I have mixed feelings about the inflated metrics. I personally don’t feel it’s as big a deal as maybe some people in the market think. And I don’t think it’s as big of a deal for the business as the child safety.

News reel:

“The victim in this case, a 14 year old girl found crying, alone, in the bathroom of a Kroger. Allegedly picked up from her school in Ohio.”

“Police say this man used a popular gaming app to track her down and start an inappropriate relationship.”

“A clayton County man in custody tonight, accused of raping a child he met online. Police say Howard Graham traveled 800 miles to pick up the little girl.”

Simone Del Rosario:

Hindenburg’s report claims Roblox “is compromising child safety in order to report growth to investors.” Their research recounted 9 situations where predators were caught by police.

Edwin Dorsey:

In my own article, I highlight 14 cases. Hindenburg found nine in the US, so there’s been a few dozen where you can just find from the media.

My strong belief is, so much of this either is unreported in the media and it might be even unnoticed by the police, one reason, I believe that is there’s this vigilante group called predator poachers that effectively does sting operations to try to catch like sex offenders and engage people engaged in these inappropriate conversations with children, and they’ve repeatedly found that Roblox is a preferred way for predators and sex offenders to try to meet kids.

Simone Del Rosario:

The allegations of it being a playground for abusers of children are nothing new.

Michael Pachter:

They are right. Unfortunately, they’re right, and they’re late, and they didn’t say anything that hasn’t been reported before.

Simone Del Rosario:

In July of this year, Bloomberg published a lengthy feature with the headline “Roblox’s Pedophile Problem.” The piece detailed situations where prominent creators in the community used their influence to groom children.

Michael Pachter:

the Bloomberg article is thoughtful, well written, super well documented, so I used it as my source, and concludes that Roblox is spending of $878 million per year. 25% of their 3.5 billion in bookings last year is is generating 13,000 reported incidents in 2023 now that those numbers sound giant, right, 13,000 sexual predator incidents reported bad.

Most of those incidents, the predators who reported didn’t actually solicit sex or or pornography from the kid. They tried to get the kid to go over to discord or Snapchat, because those aren’t monitored as well.

Do you know what the Instagram number in ‘22 was? Because I went to the National Center for Missing exploded children website, and I found this, 3.5 million reports in 2022 5 million photographs on Instagram that were child pornography, self reported. So Instagram, 5 million. ROBLOX, 13,000 like, it’s crazy.

Simone Del Rosario:

Roblox says they’ve spent nearly two decades making it one of the safest online environments for its users, mostly kids. One mitigation technique Roblox uses is not allowing images in the chat feed. But a simple google search provides a lot of videos showing you how to make images into emojis that can be used in chat.

Roblox may be spending big money to protect children on the platform. But when Bloomberg spoke with current and former employees, they detailed the gargantuan task of trying to moderate such a massive space.

Edwin Dorsey:

It just seems repeatedly like if Roblox moderation takes a step, it’s always the bare minimum step. So before banning a game, they might just blur out the title. Before game banning an account posting inappropriate stuff, they’ll just take down the inappropriate items. I think if you had like, a stricter enforcer, enforcement mechanism against bad accounts and bad actors, that would help.

Simone Del Rosario:

Hindenburg detailed a number of its own concerns, writing:

“As a test, we attempted to set up an account under the name ‘Jeffrey Epstein’ . . . only to see the name was taken, along with 900+ variations.”

Michael Pachter:

Do you know how many Jeffrey Epstein’s I know? I know three.”

Simone Del Rosario:

Along with the financial claims, Roblox rejected these safety claims in the Hindenburg report, saying:

“Roblox takes any content or behavior on the platform that doesn’t abide by its standards extremely seriously, and Roblox has a robust set of proactive and preventative safety measures designed to catch and prevent malicious or harmful activity on the platform.”

In a world of user generated content, people will undoubtedly push past the boundary of what’s acceptable in society or good sense.

The Bear Cave has detailed inappropriate nonsexual content, including the reenactment of school shootings and the Holocaust. The Verge has also reported past reenactments of other mass shootings and Wired reported on Nazi roleplays on Roblox.

Dorsey thinks there are a lot of ways they can shore up these issues.

Edwin Dorsey:

unlike Instagram, Facebook and all these other social networks, you don’t need an email or phone number to sign up. You can just sign up with a username and password.

if you get banned, they have no way of, like enforcing that ban, because you can just make a new username and password.

I think the kind of big underlying issue here, is you can’t have it so eight year olds can Track, track freely with the rest of the internet. It’s fun. It’s cool, if you’re a young kid, to be able to chat with all the strangers in the world. But as long as you have that, that is just like an insurmountable to me, huge risk that is always going to pose issues.

Roblox shouldn’t allow you to even have an open chat if you’re under 13, if you kids can just claim they’re over 14. So to me, you need to do some sort of age verification.

Simone Del Rosario:

While the Hindenburg accusations are still subject to debate, the report is already being used by activists in the UK.

The Molly Rose Foundation was formed by the parents of British teenager Molly Russell, who took her life after viewing harmful online content. The foundation’s executive director says:

“This report underscores the growing evidence that child safety shortcomings aren’t a glitch but rather a systemic failure in how online platforms are designed and run.

“The Online Safety Act remains the most effective route to keep children safe, but such preventable safety lapses will only be addressed if Ofcom delivers a step-change in its ambition and determination to act.”

While the Online Safety Act passed in 2023, UK’s Office of Communications, or Ofcom, is tasked with creating codes to guide the law. That’s in the draft phase now.

A spokesperson for Ofcom told the Guardian:

“Platforms – such as Roblox – will be required to protect children from pornography and violence, take action to prevent grooming, remove child abuse images, and introduce robust age-checks. We have set out clear recommended measures for how they can comply with these requirements in our draft codes.”

In a statement to Straight Arrow News, Roblox says they fully intend on complying with the Act.

A similar “Kids Online Safety Act” in the US passed the Senate this summer. But free speech advocates worry it does too much to restrict legal speech. It’s a challenge the UK version also faced.

Recently, the U.S. and UK announced a joint working group to tackle child online safety.

Aside from some immediate fluctuation, the Hindenburg report has yet to have a longlasting impact on Roblox stock, which would be the goal for a short seller.

Michael Pachter:

Look, in fairness to them, there’s a case to be made that Roblox is overvalued. I don’t think so, but there’s a case to be made. I understand why someone would say it’s trading at 40. It should be trading at 30. And so they they thought, if we expose them, and people agree with us, then they’ll think it’s worth 30, it’ll go to 30, and we’ll make money on our short we’ll make $10

but they picked the wrong things to criticize it for.

Simone Del Rosario:

Still, Dorsey believes there are systemic problems that could affect Roblox’s bottom line in the future.

Edwin Dorsey:

I think the cutting corners goes to every aspect of the business. So it’s not just child safety, it’s not just inflating user metrics. It is billing. It is buying items. It’s the type of games you allow. It is the internal culture and how you treat people. It’s suppressing criticism by suing your critics.

Simone Del Rosario:

Meanwhile, Dorsey’s The Bear Cave is fleshing out some beef with Hindenburg. On Monday, he published a post saying they pretty much plagiarized his work without credit, using a lot of the details he himself has presented since getting on Roblox’s trail in February 2022.