The Roblox controversy
Roblox is an online platform and game creation system that allows users to design, create, and share their own games and experiences using its proprietary engine. It fosters a community of developers and players, enabling users to engage with a diverse array of user-generated content across various genres, all within a virtual environment.
In a report published on October 8, 2024, Hindenburg Research (a financial analysis firm) claims that Roblox is misleading investors, regulators, and advertisers regarding the number of users on its platform, exaggerating this figure by over 25-42%. They attribute this to the fact that Roblox is not currently profitable, which means that its stock price and the ability of insiders to sell large amounts of stock depend heavily on the growth metrics it reports to Wall Street.
Through a statement published in The Verge on the same day, Roblox rejects these claims, explaining that “the authors are, admittedly short sellers and have an agenda irrespective of the substance of Roblox’s business model and results.”
Expectations management
At the time of this writing, no one can say whether Roblox was dishonest. Yet, one thing is sure: inflating user numbers is very tempting for emerging digital platforms. As we explain in our book, the reason is that users' expectations are the linchpin of feedback loops in digital platforms. A positive feedback loop starts when new users come to one side of the platform (let's call it side A). But these new side-A users will only join if they can connect with users on the other side (side B). The problem is that users on side B think the same way and will only join if they believe there will be users from side A getting involved too.
This scenario can lead to two contrasting outcomes, contingent on users' expectations of participation on the opposite side. In the optimistic case, users believe in the participation of the other side, prompting them to join. Conversely, pessimistic expectations lead to non-participation, resulting in what's often termed the "ghost town" phenomenon. The fascinating aspect of this dynamic is its self-fulfilling nature. When participation is expected, it materializes; when it's not, the platform remains dormant.
These "self-fulfilling prophecies" underscore the critical importance of effective expectation management for platform providers. Here are three--arguably dubious--ways to generate optimistic expectations about the platform's future growth:
- Fake users’ participation;
- Announce large future participation numbers;
- Inflate existing participation numbers.
Fake users' participation
We already described this strategy, called ‘Fake it until you make it’, in a previous entry of this blog. We gave the examples of Reddit and Udemy, which used fake content or accounts to appear more established.
In Case 4.7 of our book, we give another example from the food-delivery industry. Grubhub and Seamless, two American food-delivery platforms that merged in 2013, were reported to list restaurants without their consent. In 2020, a restaurant owner discovered her business was listed on both platforms with an incorrect menu. The company claimed it added high-demand restaurants without explicit partnerships. This practice is common in the food-delivery sector, with platforms listing restaurants by default and requiring opt-outs. This approach creates costs for restaurants, especially small ones, and misleads diners about available options, potentially leading to reputation damage for the platforms.
Announce large future participation numbers
Optimistic expectations can also be generated by announcing to current users that they will joined by many other users in the future. Boudreau (2021) tested the effectiveness of this strategy through a field experiment. The research involved sending invitations to over 16,000 potential users to join a new platform. These invitations included information about the platform's current size and randomized statements about its projected future size. The analysis of subsequent participation decisions revealed two significant findings. First, statements about the expected number of users had a more substantial impact on adoptions than information about the current user base. Second, predictions of a larger future user base led to more adoptions compared to forecasts of a smaller user base. This empirical evidence strongly supports the notion that expectations can indeed be self-fulfilling, underscoring their crucial role in platform adoption and growth.
Inflate existing participation numbers
Roblox faces these accusations, which are not unprecedented; similar claims have arisen in various industries with multi-sided platforms before. For example, consider a notable incident that occurred in 2007. Two free newspapers, London Lite and The London Paper, were fiercely competing for readership and advertising revenue in the London market. The controversy began when London Lite accused The London Paper of dumping thousands of copies to inflate their circulation figures artificially. They even went as far as to send a video to media buyers allegedly showing distributors dumping 2,900 copies of their rival newspaper. This accusation prompted the Audit Bureau of Circulations (ABC) to investigate the allegations of newspaper dumping. The ABC's role was to verify the circulation claims made by both publications, as these figures are crucial for determining advertising rates. The investigation confirmed that dumping of London freesheets had indeed been occurring.
This practice was problematic because it misrepresented the actual readership of the newspapers, potentially misleading advertisers who rely on circulation figures to make decisions about ad placements and pricing. The incident highlighted the intense competition in the free newspaper market and the lengths publishers might go to appear more attractive to advertisers. It also underscored the importance of accurate circulation audits in maintaining the integrity of the newspaper industry and protecting the interests of advertisers.
Take aways
The Roblox controversy underscores the crucial role of user expectations in fostering the growth of digital platforms. Multisided platforms may be tempted to artificially inflate participation numbers or even fabricate participation entirely. They might justify this dishonesty by arguing that it is merely temporary, believing that their deception could become a reality if enough people accept it, given the self-fulfilling nature of expectations.
In addition to raising substantial ethical concerns, this strategy carries significant risks, as investors, competitors, and users may challenge the platform's claims. The potential damages can be considerable and enduring, as negative feedback loops can swiftly take hold, leading to the departure of some users and triggering a cascade effect amongst others. Therefore, it is essential to emphasize the importance of transparency and honesty in platform promotion; misleading practices can erode user trust and ultimately undermine the sustainability of the platform’s operations.
(During the preparation of this post, the author used GenAI tools to collect ideas and improve the expression. After using this service, the author reviewed and edited the content as needed and takes full responsibility for the publication's content.)
