Roblox: The Next Big Thing in Metaverse, User-Generated Content, Technology, and Gaming
Roblox, the user-generated cross-platform gaming phenom, is scheduled to go public on Wednesday, March 10, via direct listing (ticker symbol, “RBLX”). The direct listing offering will allow existing shareholders to sell their shares directly to outside investors, without issuing new shares. Share price will be determined by supply and demand of orders entered with the NYSE on its first day of trading.
With a daily active user count above 32 million and climbing steadily, there is serious hype surrounding the company that is being touted as the YouTube of gaming. From activations with major brands to virtual concerts, Roblox is uniting audiences across the world with its open-sourced digital universe.
So, what exactly is this Roblox thing that the kids are into these days?
A Human Co-Experience Platform
According to its S-1 filing, Roblox is a three-dimensional “human co-experience platform” and it is incredibly popular. While the majority of its users are under the age of 13, Roblox has steadily increased its footprint in older age groups and is attracting the attention of older Gen Z’s and millennials, looking for new forms of entertainment.
Roblox is available across platforms, including iOS, Android, Xbox, and the Oculus Rift. It offers a“metaverse” where users can interact with one another in a virtual world through various “experiences” such as games or events or worlds. The platform is fueled by an ecosystem of developers/creators (who create experiences or items for avatars) and players (who immerse themselves with the metaverse by playing games, attending events, meeting up with friends, and customizing their avatars).
The platform consists of three components: the Roblox Client, the Roblox Studio, and the Roblox Cloud. Roblox Client is the conduit through which users access the metaverse. Metaverse experiences are built by developers and creators using the Roblox Studio. And everything is housed on the Roblox Cloud infrastructure, powered by AWS.
Being curious, I decided to download the Roblox app on my iPhone and started to play some games to get myself better acquainted. As a kid, I owned a couple different consoles and absolutely adored the Mario franchise and Pokémon games, which I was just recently re-introduced to when I purchased a Nintendo Switch back in March of 2020. Like many people, the isolation brought about by the pandemic lockdowns and work-from-home transition rekindled my love for video games. I figured I would give Roblox a try and was pretty impressed with what I saw.
After I downloaded the app, I was asked to set up an account, which took about a minute. I was given the option of adding friends but, unfortunately, none of my friends are on the platform yet (I’ve been working on convincing my gamer pals, many of whom say they’re too busy with Warzone or Animal Crossing). Using some of the free presets provided, I created my own, very non-descript, avatar and began exploring.
I then spent a couple hours testing out various experiences like the Hot Wheels and Piggy games and playing a virtual piano. I stuck to my own little corner of the metaverse as best as possible, ignoring all chat requests from other players or one-on-one challenges. I found the gameplay to be pretty intuitive and, within a half-hour, I started to get the hang of hopping around these little worlds. Whenever I got bored of one experience, all it took was a simple click and I easily popped out to join another.
While the graphic quality of games are clearly below the typical standard you’d be accustomed to seeing on consoles or PC, the variety can’t be beaten. With Roblox, you can play everything from shooters to RPG to racing and more. Roblox is also fascinating in that it offers developers of all skillsets a market for their experiences. There are games that were clearly made by experienced professionals and then others that were likely made by a ten year old who is just starting to learn to code. Although most games are pretty simple conceputally, some games are based in complex worlds, with in-depth characters and adventures. All indications seem to suggest that graphic and gameplay quality will continue to improve as more professional developers come onboard and as payouts start to become more lucrative.
I didn’t get the chance to explore other non-gaming experiences (apart from trying out the piano simulator) but did notice that the Why Don’t We’s had a launch party performance from their digital LA mansion on the weekend. In typical millennial fashion, I was late to the party (so to speak) and will have to make a note of it in my calendar (do kids still use those?) for the next time Roblox showcases another music-related activation.
All things considered, Roblox made me feel like a kid again — except in a post-modern world. Given the sense of isolation that these lockdowns have forced upon me, it was refreshing to be able to escape through this platform and enter into a completely alternative universe. I will definitely be spending more time on Roblox and look forward to playing more games, attending virtual concerts, and just exploring to pass the time.
The Roblox Business Model
Like Fortnite, Roblox allows users to join and explore for free but also provides options to upgrade one’s avatar or digital experience more generally. Enhancements can purchased using Robux — the in-app digital token used to buy experiences and avatars. You can think of Robux as being similar in concept to tokens you would buy at a traditional arcade. Users can purchase Robux from the Apple or Android stores, using PayPal and other online payment methods, or directly from the Roblox website using a credit card. Children will require permission from a guardian to make any purchases, which must be made by someone above the age of 18. Users can buy Robux piecemeal or on a monthly subscription basis (referred to as Premium), with different tiers depending on how many Robux they subscribe to. There are volume discounts but, typically, one Robux costs roughly US$ 0.01.
After signing up for the app and creating your avatar, you are prompted with the option of buying Robux to purchase experience-specific enhancements and items from the Avatar Marketplace, including accessories for your avatar or emotes. While most experiences are free to access, Roblox does offer pay-to-play experiences as well, which tend to be higher quality in terms of both graphics and gameplay.
Developers and creators have four means of generating Robux:
- By selling users access to their experiences and/or enhancements to those experiences;
- By selling content and tools to other developers and creators;
- By selling items to users; and,
- For engagements for the amount of time that Premium subscribers spend on their experiences.
Roblox retains a portion of every Robux transaction, distributing the remainder to developers and creators. Developers and creators, in turn, receive Robux and can either (i) re-invest the Robux into the platform itself by purchasing code from other developers or for platform-specific marketing campaigns or (ii) cash out into traditional currency at a rate of US$ 0.0035 per Robux. In other words, a developer who has earned 100,000 Robux can use the Developer Exchange to convert them into US$ 3,500. Conversion to real-world currency is restricted to persons aged 13 and above and to those with at least 100,000 Robux.
So how much revenue has Roblox generated from selling Robux? The numbers are absolutely astronomical. In the nine months ended September 30, 2020, Roblox generated over $588 million, up from ~$350 million last year. While management admits some of the growth was, in part, fueled by the pandemic, forward projections are eye-popping with expectations that revenue will double to $320 million in the first quarter of 2021 alone. For context, that’s more than Roblox generated in revenue in all of 2018! On a per user basis, average bookings peaked in the second quarter of 2020 at $14.81, dropping slightly to $13.73 in the third quarter. Compare these with the years prior ($8.78 for Q2 2019 and $9.00 for Q3 2019) and the magnitude of Roblox’s growth looks even more impressive.
From a costs perspective, in the first three quarters of 2020, Roblox paid a significant chunk of its earnings to payment processing fees (26%), developer earnings (17%), compensation (14%), and infrastructure (8%).
Payment processing fees include the fees that Roblox pays to the App Store and Play Store for processing user payments to purchase Robux. The fees levied against developers in the app stores for both Apple and Android devices have become a hot-topic issue in the tech community, with Fortnite-owner Epic Games making headlines when it got into a public battle with Apple over what Epic claims to be a usurious upcharge. The vast majority of Robux are purchased through either the App Store or Play Store and, as such, Roblox is at the mercy of Apple and Alphabet when it comes to processing customer sales. These fees will cotinue to eat into Roblox’s margin as revenue growth continues.
Developer earnings are another major source of Roblox’s cost of sales. Roblox paid over $111 million to developers and creators in 2019, up more than 56% from the year before. In just the last nine months, Roblox has already paid out over $150 million. That’s a lot of Robux! While its website boasts about developers earning millions, only a small subset of the creators actually do. In the most recent reporting period, only 32 developers of the over 960,000 developers earned $1 million or more from Robux. In fact, less than 0.04% of developers earned more than $1,000 last year. Given the stage in its growth trajectory, however, aspiring developers and creators should not shy away from becoming leaders in this emerging platform. As engagement continues to see improvement, ad dollars will follow and payouts should increase over time.
True to its substance as a growth company, Roblox has generated negative net income since its inception, including a loss of $205 million in the nine months ending September 30, 2020. This is not surprising given its business model and strategic prioritization of product improvement and driving platform awareness over producing short-term financial gains. Like any tech stock, Roblox’s business model is driven by volume and by achieving as much growth in terms of its operating metrics as possible. So far, Roblox has managed to prove itself in beating even its wildest projections.
What are Some Challenges that Lie Ahead?
Roblox has picked an interesting time to go public. Equity valuations have started to see some downward pressure as treasury bond yields have continued their slow climb upwards since reaching a trough in August 2020. Although the central bankers across the G7 have stood by their commitments to keep bond yields low, inflationary signs are starting to show and the stock market has witnessed a rotation out of growth (i.e. companies with negative net income and price-to-earnings valuations in the high double-to-triple digits) into value (i.e. companies with many years of predictable positive EBITDA growth).
Can they build on the strength of the pandemic numbers? All indicators are suggesting they can. With strong daily active user growth and an expansion outside of the traditional kids demographic, Roblox is poised to continue to rise in prominence in the gaming and metaverse space. Experiences are becoming more and more real and people from all over the world are starting to tune in, with tremendous growth being witnessed in South America and Asia as well.
Roblox is also keenly aware of the regulatory scrutiny it will be subjected to due to its popularity with kids. Privacy and consumer protection laws for children are much stricter than with adults and advocates are already starting to sound the alarm regarding what they claim to be pushy advertising tactics, which encourage kids to pester their parents to buy them more Robux.
Perhaps, however, its biggest long-term challenge is the fact that its consumers are, well, fickle. Children have short attention spans and the cycle of what’s in and what isn’t often changes like the wind. Their interests grow and wane. The millennial reader will recall how popular Pogs and Crazybones were at a time, only to end up packed away in an attic somewhere (and discovered years later when their boomer parents decide to do some long-overdue spring cleaning). Video games, however, as a concept have remained quite popular with kids (and now adults as well) and this popularity is expected to continue even after lockdowns are lifted.
With its fresh take on bringing these immersive virtual worlds — from games to concerts and much more — to the masses for free, Roblox is perfectly positioned to succeed in this post-pandemic world.
