If they use a frozen model then one person using it to generate some NSFW content shouldn't make the output more NSFW-laden for anyone else.
So I don't see how they're "damned if they don't".
The specifics of their approach don't even matter - all it takes is one random Twitter user or media outlet to report on "immoral" output generated by someone to damage the brand image.
That's what they want to avoid and that's why they are trying to take preventive measures.
Why would you think that this company needs to Thought Police their gamers when thousands of others are able to host creativity based games without being dystopian?
When comparing the Minecraft scenario to the AI Dungeon scenario under the purview of "doing creative things with games," I don't find the two scenarios to be much different. However, for one of those things, it's a possibility within the vast play space of Minecraft - you could even create genitalia and display profanity with just alphabet blocks - but for the other scenario, depending on how you see it, it's content that is generated, served, and potentially stored by AI Dungeon. I'd be concerned about the publicity if I was AI Dungeon as well.
Wow. You act as if that's something new :D
There's even an actual job for doing just that: it's called an editor. You know, the people who work in media, publishing houses, TV, radio, papers, magazines, that kind of thing. It's what they do. Everywhere. Editing content. Removing comments, changing words, making sure the views represented in the publication match the intentions and policies of the investors and parent organisations, etc.
You act as if something is new and evil just because it's done with computers. It isn't. It has been the case for as long as papyrus and cave paintings have been around. Back then it was don't anger the chief/king/Pharao, today it's don't anger the Twitter mob or the hand that feeds you. Same difference.
Games are a medium just like magazines or online blogs and comparing blocky dongs in Minecraft with explicit child pornography says a lot about your understanding of "creative expression". Really makes me wonder sometimes.
I'd be very worried about this in their shoes and acting very similarly.
"They knew about this problem, they even attempted to half ass fix it, but it's obviously their mind is on the subscriber money, and not preventing blatant CHILD EXPLOITATION!"
Then you throw some more money at a yet unsolvable task, and then in 2 years, when some other outlet gets triggered, you have to defend yourself once again.
"They've know about this problem for 5 years and it's still rampant in their community! Shame on you JERF INC.!"
This is not a technical consideration, it is just PC at its worst.
You either deny that games are a medium or you're under the impression that whatever you read in news publications, books, see in films and TV is the result of the unfiltered creative outlet of the producers. News flash: it isn't.
There's heavy editing going on everywhere and just because it targets a specific computer model in this case instead of a more "traditional" product like a novel, film or stage play doesn't make an iota of difference.
In fact this demonstrates the maturity of the technology and its use if it gets the same treatment as every other public media.