Roblox’s Hindenburg moment

Will a scathing report crash its valuation?

Oct 10, 2024

The SuperJoost Playlist is a weekly take on gaming, tech, and entertainment by business professor and author, Joost van Dreunen.

I was going to write about my observations from last week at Unreal Fest and the Bitkraft Summit, but then everything went sideways. So I owe you that for later.

Instead, someone tried to steer Roblox into the ground.

On to this week’s update.

BIG READ: Roblox’s Hindenburg moment

This week, financial research firm Hindenburg published a comprehensive report on Roblox, triggering a drop in the company's share price. Hindenburg, notorious for short-selling, profits from declines in publicly traded companies, and lends its name from the 1937 crash of the Hindenburg airship.

The report is extensive. Its investigation of Roblox includes interviews with former employees, analyses of Roblox’s platform data, first-hand experimentation of simultaneously running fake accounts, baiting sexual predators, a survey of online discussions among users, web traffic patterns for popular Roblox experiences, instructional videos on how to ‘hack’ the game on YouTube, and financial statements. The rigor is convincing and exhaustive. But does it identify a weakness in Roblox’s fundamentals like an inflated user count and lack of child safety protections?

The researchers make several notable claims. First, they argue that Roblox has consistently and deliberately overstated its daily active user count. The investigation presents a detailed assessment of the time spent, arriving at 22 minutes of average playtime per user, compared to the publicly reported figure of 144 minutes according to Roblox’s financials. Hindenburg further contextualizes these numbers by comparing them to a recent Gallup survey that shows the time spent on major social media platforms.

At first sight, the methodology appears credible, implying that Roblox hasn’t just been overstating its numbers, but is hugely inflating them. That seems rather excessive for a firm that is as heavily scrutinized and, I should add, has been notably forth-coming with its data and metrics. Unlike most of its peers, Roblox reported detailed user data for years, which doesn’t rhyme well with a firm that is actively defrauding investors.

Hindenburg nevertheless offers a somewhat glib generalization that, in the absence of short-term financial results, tech firms tend to brag and overstate their performance. Sounds like old money talking to new money. But despite the tone, it raises a fair point. As is the case with any platform economy, improved transparency by de-duping accounts gives a clearer idea of a firm’s performance.

Next, Hindenburg claims the platform is an unsafe environment for children. It argues that Roblox offers inadequate protections against sexual predators and inappropriate content. That’s a big problem. And I’m sure that Roblox is well aware of the issue. Hindenburg argues that privacy and parental controls are ineffective and easily bypassed. According to an interview with a former moderator, grooming accounts for one in five complaints received by Roblox’s (overseas) call centers. That’s pretty damning. What would be helpful in this context is a sense of scale (e.g., how many complaints?) and a better sense of the scope of Roblox’s moderation effort. Let me take care of that for you.

Indeed, Roblox seems to be on the lower end of the spectrum when it comes to the number of content moderators, showing only 0.77 per 100,000 users. Compared to the group average of 1.62, which is slightly skewed since the number for LinkedIn is based on the EU-only, an immediate move to address Hindenburg’s claim here is to invest in more moderators. But does that make Roblox safer for children, or, more likely, does it de-risk the financial positions of investors?

As a kids-oriented application, Roblox deserves—and accepts—additional scrutiny. The only acceptable number of reports on the online exploitation of children is, it should go without saying, zero. Nevertheless, in 2023, the National Center for Missing & Exploited Children (NCMEC) received 13,316 reports involving Roblox. The NCMEC received the following number of reports for online services and game-related firms.

Keeping in mind these are alleged reports, you’ll notice the hefty increase for Roblox over the years. Since 1998, total instances of suspected child sexual exploitation reported to NCMEC have skyrocketed from under 5,000 to 36.2 million in 2023 across all platforms. It tells you that the issue of sexual exploitation of children on the internet is not a problem unique to Roblox.

More so, 28 percent of Roblox’s cost structure entails “Infrastructure and Trust & Safety.” When it comes to trust and safety, the firm’s efforts include content moderation systems that combine AI-powered tools with human oversight, age verification processes for accessing mature content, comprehensive security measures to safeguard user data and prevent fraud, and dedicated community support to handle user concerns and disputes. Perhaps a better move would be to take a similar approach to Reddit, which relies on its users to moderate much of its content. Claiming 60,000 moderators, the platform leverages people’s shared sense of self-censoring to offset the cost of outsourcing the work to low-wage countries.

Reporting consistent losses, Hindenburg further argues that Roblox faces “growth challenges” due to saturation in key markets. It suggests the firm is unlikely to reach its self-imposed goal of one billion daily active users and, by extension, miss its revenue goals. Specifically, Hindenburg calculates that the average conversion rate for daily active users has been declining and that less valuable users from regions in Asia are now a larger part of its overall audience. Conversion rates have declined from a high of 1.5 percent in 2020, during the height of the pandemic, to 1.21 percent more recently. It shows a consistent decline, yes. But during this period its audience also grew substantially. It would be naive to expect those averages to stay at the same level or increase. It’s a pattern we’ve observed before when popular mobile titles like Candy Crush or Clash Royale reached critical mass and started adding millions of users each month. Even as the active player base expanded, the average value of the total users declined.

Moreover, the push into Asia, which was an important piece of its IPO thesis to establish future growth, has netted the expected results. According to Hindenburg, “‘Asia’ and ‘Rest of World’ had average quarterly bookings per [daily active user] of $5 and $3.84, respectively,” which, it argues, is a move into low-spending players.

To make up the difference, Roblox has a few different strategic options. Matthew Ball, as always, laid out a great overview of the different paths here. Succinctly, key strategies include reducing app store fees, increasing average bookings per daily active user by enhancing monetization, particularly in lower-spending regions, and aging up the user base to target higher-spending demographics. The company is also exploring the introduction of paid or premium content, which could significantly boost revenue per user hour without proportional cost increases. Roblox is leveraging its scale to venture into new territories, such as messaging and voice calling features, expansions into dating, corporate recruiting, and educational programs.

But perhaps the most prominent route is its expansion into advertising. Increasingly, established brands have come to realize that young audiences like to spend time playing and hanging out online. Advertising promises new revenue streams, because (1) it does not incur any app store fees unlike in-game transactions, (2) allows Roblox to charge advertisers and their agencies to pay a developer fee for specific privileges, search optimization, and unique toolsets, and (3) benefit from affiliate fees and referrals. Rather than charging its user base money, Roblox can monetize advertisers eager to connect with users. To that end, ALDORA recently released a report that showed immersive experiences outperform more conventional digital marketing strategies in mobile app stores.

Even so, the Hindenburg report claims that the firm’s push into advertising is dishonest toward investors because of the alleged inflated user numbers and overall activity. It effectively cuts off one of Roblox’s primary paths toward profitability and raises questions about the precise value of its audience at a time when it is stepping up its efforts to cater to brands and advertisers.

What’s next?

The Hindenburg report presents a loud but largely toothless challenge for Roblox, even if it highlights issues that deserve more serious attention. What weakens Hindenburg’s claims is that despite its self-righteous tone, the research remains thin, decontextualized, and targeted. Instead of presenting a quantified assessment and comparative analysis (something you’d expect from a financial firm), it leans into openly accusing Roblox of deliberate malpractice and indifference toward child safety in favor of growth. It makes an emotionally evocative argument, certainly, and taps into the increasingly pronounced skepticism among regulators and researchers.

The growing concerns expressed by parents and politicians around social media use and online activity among minors are

But as we’ve seen over the past few years, politicians enjoy publicly chastising social media firms to win favor with voters without any tangible legislative changes, and academic writers tend to fatally conflate children’s play with gambling and pornography. It nevertheless presents a strategic challenge for Roblox and other firms that cater to children. (Quick question: Wouldn’t it make mobile app stores complicit for hosting third-party content catering to kids that features free-to-play monetization? Asking for a parent.) Anyway, given the current political climate and the fact that it’s an election year in the United States, I’d expect to see this issue escalate to some hearing, as has been a tradition in the games industry since its inception.

To address these challenges, Roblox may ultimately overhaul its platform structure and end up with a two-tiered system: one a paid, tightly controlled environment with stringent monitoring and safety measures (think: Disney World), the other a free version with more limited features and higher risk (think: Jersey Shore). It is a model that mirrors the evolution of the broader internet, where increased safety and functionality often come at a price.

Furthermore, Roblox might consider bolstering its safety credentials by either developing advanced protective tools or acquiring a respected certification provider. Companies like SuperAwesome, with its SAFE AD watermark, or emerging platforms like K-Id, which emphasizes continuous parental consent, are a growing industry segment responding to demand from parents, investors, and game makers.

Ultimately, the best one could say is that the Hindenburg report revitalizes the important social dialogue about child safety, despite its potential biases, and forces a necessary conversation about the future of online play spaces. I remain unconvinced, however, that a handful of people in finance will have a superior moral compass.

NEWS

Ubisoft buyout rumors persist

Despite a rich portfolio of intellectual property, Ubisoft's current market valuation of $1.39 billion significantly underperforms industry peers like CD Projekt Red and Embracer Group. Coupled with recent operational challenges such as the delay of Assassin's Creed Shadows and underwhelming sales of Star Wars Outlaws, the French publisher now finds itself positioned as an attractive acquisition target. The company's depressed share price, which recently hit a decade-low before surging 30% on buyout speculation, further underscores the market's anticipation of a potential transaction. Will it sell though?

What makes this especially noteworthy is the resistance among Ubisoft’s leadership, the Guillemot family which maintains a majority ownership share, and unwillingness to sell to private equity. That opens a few other paths. Among them, non-endemic companies and platforms are increasingly recognizing the sector's broad appeal and high user engagement. This shift has expanded the pool of potential acquirers beyond traditional gaming companies to include tech giants like Amazon and X (formerly Twitter). The timing of such an acquisition, potentially preceding the next console cycle, could provide a significant boost to any aspiring participant to take immediate market share. It’s a matter of speculation, of course, and hugely depends on the Guillemot family’s thinking. To note: at least twice in its history did Ubisoft successfully resist a hostile takeover, and the French ownership's aversion to private equity buyouts adds layers of complexity to any potential deal. That doesn’t change the implications of one of the last remaining legacy publishers facing the music for its economic model and, by extension, a change in the European market landscape.

Nintendo releases an alarm clock for some reason

Entirely unprovoked, the Japanese toymaker’s latest invention, Alarmo, is now available for sale in the United States. It’s an alarm clock that responds to your body movements and wakes you with music and sound effects from its popular titles. In honesty, waking up and immediately playing video games in bed for a few hours is the stuff anyone’s childhood should be made of, although I can easily see a more stressful scenario “Link. Wake up, Link. You’re late for school, Link. You’re going to miss the bus, Link.”

PLAY/PASS

Play. Google now has to offer alternatives to its Google Play store following a permanent injunction issued by a US Judge and is prevented from paying app makers for their loyalty for three years. Big win for Team Epic.

Pass. Layoffs will continue until morale improves, apparently. This month’s update from the Bureau of Labor Statistics showed positive numbers across most of the economy, with the notable exceptions of Motion Pictures, which was down 1,700 jobs, and Broadcasting and Content providers, which lost 1,000 positions. With a record 13,300 job cuts so far this year, gaming layoffs haven’t reached rock bottom just yet.

NEXT UP

This week it’s Advertising Week in New York. Brands have discovered gaming and they’re to the big city to learn more about it. Yesterday I moderated a discussion with Discord and EA and sat in on a panel at the IAB to discuss user-generated content with Twitch. In the next one, I’ll tell you all about it.

However, next week I’m also meeting Sony’s two new CEOs. Tell me what to ask them!