The Roblox S-1: The world’s largest playground.
Including guest analysis from Taylor Hurst. Taylor is from Konvoy Ventures where he focuses on video game technology and infrastructure.
Roblox has been hailed as one of the most exciting companies to go public in 2021. I’m excited. You’re excited. We’re all pretty excited
Having already delayed once (and switched from their original plan of an IPO), they will be the fifth company to do so by a direct listing — following in the footsteps of tech giants, such as Palantir, Spotify, Asana, and Slack. The price is still TBD but the last valuation, fresh from their January raise of $520 million, put the company at $29.5 billion. Pretty tidy.
However, a few of you may be asking — what on earth is this company, ‘Roblox’?
You’re not alone. Over the last couple of years, there has been a slew of articles aimed at de-mystifying the firm: All you need to know about Roblox, A quick guide to Roblox, for adults, and What is Roblox? Their very existence highlights a key contradiction of the platform: for many adults, Roblox is the biggest B2C company that you have never have heard of, unless — you know — you’ve been tracking their IPO or have kids.
So, here’s the low-down: Roblox is an online platform, where users can access millions of shared, virtual, 3D spaces and games, all created by its own community of online players. The core demographic is children and, as a result, the games look exactly like what you would expect a bunch of kids to create (although there are professional studios that build within it as well). It’s wacky, colourful, and kinda weird.
Finally, as you may guess from the valuation, it is very, very big — but we’ll dive into that later.
- The history of Roblox
- Roblox today
- Looking at the numbers
- Roblox investor day
- The future of Roblox
📺 The history of Roblox
Roblox was inspired by (fun) educational physics software.
Roblox was officially founded in 2004 (under the short-lived name Dynablocks) by David Baszucki and Erik Cassel. However, the real origin story starts fifteen years before when the two founders were working together at a very different company, Knowledge Revolution.
Knowledge Revolution was founded in 1989 by David Baszucki and his brother Greg Baszucki (Greg sits on the Roblox board today). An educational software company, its key product was Interactive Physics, a “2D simulated physics lab”. Students could test, play, and mess around with life-like mechanics to better understand how physics worked. The toolbox of digital hinges, ropes, springs and more allowed them to experiment with problems generally only seen in physics textbooks.
A little after the company was started, Cassel joined the team. According to legend he first read about it in a MacUser magazine (a different world!) and was intrigued enough to fly out and interview. It clearly went well as he became VP of Engineering. Baszucki and Cassel continued to work together for ten or so more years, until the company was acquired for $20 million by MSC Software.
However, post-sale, Baszucki and Cassel kept in touch, reminiscing and dreaming:
“Seeing how kids lit up when they were creating things using our physics software made me think of what would be the ultimate platform for our imagination. Also, I like construction toys and I saw the direction 3-D rendering was going. It became clear to me that there was an opportunity to create an immersive, 3-D, multi-player platform in the cloud where people could imagine, create and share their experiences together.” — David Baszucki
In 2004, Baszucki and Cassel started to realise these dreams and founded Roblox.
Despite kids having much more limited access to the internet (back then), Roblox saw consistent user growth.
During Roblox’s first decade, it would be safe to say that they attracted a lot of users. The below chart brings this to life: by tracking the first and last ID number allocated each year, we can approximately measure the growth via the number of new accounts.
In 2006, its first year of public access, there were around 11k user IDs. Four years later, in 2010, there were shy of 14 million individual user IDs. By 2014, ten years after the company was founded, Roblox had allocated over 75 million user IDs.
This is particularly impressive when you consider how the users were accessing it. Today, Roblox is accessible through pretty much every platform you can think of — iOS, Android, PC, Mac, and Xbox, and even a range of VR headsets. But back in the early days, this wasn’t the case. Especially back in 2004, most kids wouldn’t have had a personal computer. Even when it launched on iOS and Android in 2011 and 2014 respectively, how many nine year olds had their own smartphone back then?
Unfortunately, as the number of users grew, so did the risk of bad players.
In any platform, there will be some malevolent users. However, on a child-centric platform, the average user is exponentially more vulnerable and therefore impact of any misuse or abuse is much is much worse. Roblox is no exception.
One of the worst was reported by TechCrunch in 2018. I’ll spare you the details but, at a high level, a user subverted the game’s protection systems so that they could customise the animations. This enabled them to simulate disturbing and unwelcome activities with other avatars. It was the type of thing that has no place on normal public platforms, let alone one that so many children use.
Grim as it is, unfortunately it’s only one example of the various small scandals that have dogged the platform over the years. It’s an unwelcome but unsurprising consequence when your user base often has a single-figure age. And, to be fair, Roblox had worked hard on children safety. A year after public launch, the firm became compliant with COPPA (Children’s Online Privacy Act) and created a safer chat version for users under thirteen years old, which only allowed communication through picking pre-written phrases.
It is an unfortunate truth that there are awful people out there on the internet. Roblox has clearly been built with safety in mind but as they have grown, it has become harder and harder.
During the COVID pandemic, home-bound users turned to Roblox.
As seen from the user numbers, Roblox was always a hit. However, at no time was this more evident than in the past year aka the global pandemic.
Lockdown restrictions meant that millions of children suddenly had to stay home. Roblox’s usage swelled as it offered ways for these bored, lonely kids to interact with their friends without leaving the house.
Fascinating behaviours emerged. Roblox had always been a user-led platform, with children figuring out hacks far ahead of the adults and this time was no different. Far before VC firms (well most of them anyway) were getting serious about digital meetings and online socialising, Bloomberg reported on Robby Scianna’s 10th birthday party being held via Roblox in March. And it wasn’t only the fun stuff, iD Tech Campus — coding classes for kids — was reported to be running via Roblox in the same article, enabling it to attract more children to its courses via the new infrastructure. *
The company was quick to adapt to these new opportunities. In July, it announced the launch of Party Place. Based on the venue from the most recent Bloxy Awards (the annual Roblox-based awards to celebrate its community), it allowed users to host their own events — from hangouts to more formal gatherings.
The swell set the conditions for Roblox to go public.
🤖 Roblox today
So, how does Roblox look today? Before we dive into the numbers, here’s a quick primer on how it works.
There are two ways for users to interact with the platform.
When you log onto Roblox, you can use it in two different ways. The first is more traditional — users explore and play like you would any other gaming platform. The second is more enterprising — users can create items and experiences (the name for titles within Roblox e.g. a game).
Users who create experiences are called developers and those who create avatar items are called creators.
The platform consists of three parts.
- Roblox Client — This is the main interface for the majority of users. It allows you to explore the different worlds and games as a player, including purchasing items on the marketplace or experiences.
- Roblox Studio — This is what developers and creators use to build, publish, and run their own work.
- Roblox Cloud — This is the services and infrastructure that power the whole lot.
Developers and creators are able to earn via Robux transactions.
The currency of the platform is Robux. This can be bought as one-offs or via the Roblox Premium subscription. While the majority of the platform can be enjoyed without spending anything, users can spend their Robux on specific items — for example, if creators choose to sell their avatar customisations rather than offer them for free.
Roblox makes money by retaining a percentage of every transaction and the rest is distributed to the developer /creators, who can exchange Robux into real world currencies.
But only a small minority make significant amounts.
In the year leading up to September 30th 2020, ~960k developers and creators earned from the site. That said, it was only a small number of the top earnings, who made significant money. Of these developers earning, 0.1% made over $10k and a tiny 0.03% made over $100k. Roblox is great for pocket money but it’s clearly no easy feat to make a living via the platform.
It’s dominated by younger users.
As you might expect, Roblox‘s user base skews young. A whopping 25% are under nine years old. In fact, 67% of all users are under 16 years old.
It sounds an obvious point to make but this average age skews everything. As has been touched on before, and will come up again and again, businesses — especially online, open, social platforms — have to rethink so many basic assumptions to cater for and build around a user base who have to go to school, who have limited spending power of their own, who aren’t able to make a lot of their own decisions, who are innocent. It’s a boon but also an on-going challenge.
The concepts of personalisation, customisation, and self-expression are embedded into the company.
Reading through the S-1, these ideas come up again and again. Within the platform, the core focus for self-expression lies in the avatars that represent users on screen. As noted, “all users have unique identities in the form of avatars that allow them to express themselves as whoever or whatever they want to be”. No doubt, the importance placed on their concepts has played into the platform’s success to date with Gen Z and Gen Alpha.
Avatars are the obvious focal point for this. Between the Avatar Editor and Avatar Marketplace, users can tailor everything from the size and body shape of their avatars to adding custom clothing, accessories and even movements. Key to this is the persistent identity it offers i.e. what you make them as within the Avatar Editor is exactly how they appear within most experiences.
Evidence of the on-going importance of this can be found in the recent Loom.ai acquisition, which took place in December 2020, just after the original IPO was delayed. Loom’s USP lies in its ‘Loomies’, high-fidelity digital avatars that are accurate and aesthetically pleasing without quite venturing into the uncanny valley.
The avatars are powered through real-time facial animation tech, deep learning neural networks, computer vision, and visual effects, able to translate an image to a live 3D animation.
For me, this folds neatly into furthering the quality of personalisation on the platform. Although Loom’s core purpose is around translation of real faces to the screen, imagine then how users are able to personalise their own likeness, once they have a high-quality version as a starting point? Dye your hair: check. Add elf ears to yourself: check. Give yourself a tattoo: check. It enables a new path of personalisation, where the fun is seeing in digital what you won’t (or can’t) do IRL.
🧮 Looking at the numbers
⭐️ Guest analysis from Taylor Hurst ⭐️
The pandemic saw a jump in bookings in 2020.
As Phoebe touched on before, the pandemic had a clear impact on the company’s business. There was 98% quarter on quarter growth in bookings between Q1 and Q2 of 2020. Further to this, Bookings grew from $457 million in the first nine months of 2019 to $1.24 billion in the first nine months of 2020.
However, while this growth is impressive, it doesn’t tell the whole story. Or more specifically, revenue doesn’t tell the whole story. Roblox is still far from profitability due to the costs of revenue — especially on mobile. It’s important to look at bookings (or sales) instead of revenue because companies selling virtual items recognise the majority of revenue over the estimated average lifetime of a paying user (in Roblox’s case that is 23 months).
The high cost of mobile platform fees does not bode well for a mobile-first future.
If you take a look at the Roblox Developer hub, you’ll see that for purchases generated through Xbox, Apple, or Google, 49.5% of sales goes to the developers (good) and app stores (not as good).
According to the S-1, 52% of sales were subject to a mobile platform fee. So in 2020, roughly $161 million of $644 million in sales went to platform fees. For a company whose product is primarily engaged with through mobile, this is a not a strong indicator of future profitability.
That said, this could change considering the ongoing regulatory battles that Apple and Google face — as well as a proliferation of instant games technology that can be played through any mobile application. Certainly an area for Roblox — and any potential investors — to watch.
Notably, Roblox has maintained their unit economics during this supercharged period of growth.
A positive area of their financials is the Average Bookings Per Daily Active User (ABPDAU). The pre-COVID 2019 ended with 17.6 million DAUs. The first nine months alone of 2020 amassed 31 million DAUs (now 32.6 million as of the most recent Investor Day).
Yet, even with that significant growth in DAUs, Roblox saw an increase to $39.93 in the first nine months of 2020 compared to $39.40 for 2019 in ABPDAU demonstrating strong unit economics scaling with their growth.
The developer/creators community is building more than ever.
Roblox benefits from an ever-changing content set, via the work of the developers/creators. The metrics hidden across the S-1 unpack this user group.
- There are a lot of developers/creators: Roblox currently has over 8 million active developers/creators building either games, experiences, assets, or cosmetics.
- They are hustling and building: These developers/creators built 20 million experiences in the last nine months of 2020 alone.
- They are also earning more than ever: With the increase in games, there has also been a significant increase in Developer Exchange Fees. In 2020, $328.7 million was paid out to developers compared to $111.9 million in 2019 and $71.8 million in 2018.
- And many of the top experiences were made recently: Between January 1, 2015 and September 30, 2020, 50% of the top 100 annual experiences (by hours) were created in the two years prior to achieving their rank. This shows that the content is continually improving, and the platform evolving.
User engagement is equally high.
The user community is more active than ever, sampling the developers and creators’ work.
- They play across multiple experiences: Every month users engage with an average of 20 experiences across the platform.
- Spend hours and hours playing: Users spent 22.2 billion hours on the platform in the first nine months of 2020. That’s an average of 2.6 hours per day, presumably after they’ve finished their homework…
- And are talking all the time: Every day, 2 billion (!) Roblox chat messages are sent across the 150 million monthly active users (MAUs). This is roughly 13 messages per monthly active user. To put that into perspective, WhatsApp, the largest messenger app in the world has 65 billion chat messages sent per day across 2 billion MAUs, roughly 32 per MAU. It doesn’t immediately sound like a great comparison but take into account that WhatsApp is only focused on chat. This isn’t even Roblox‘s core function — demonstrating one aspect of the incredible engagement.
Together, these metrics show how Roblox benefits from an ever-changing ecosystem — driven by the developers/creators — that is continually giving players new experiences. In turn, this incentivises players to spend money on Robux which can then be spent in games or on cosmetics, putting Robux back to developers/creators and creating a mutually beneficial experience for all parties involved.
💰 Roblox investor day
In anticipation of the upcoming listing, Roblox held its Investor Day, streamed live via YouTube, on Friday, February 26th. At time of writing this, a mere week later, it had been viewed more than 580,000 times. One suspects this is slightly more views than most investor announcements.
We could write so much more on this stream alone. However, in the interest of time, we’ve constrained ourselves to picking out our respective highlights.
Taylor: An important highlight that came from the investor day was the focus on building a safer platform. With 54% of Roblox users being under the age of 13, it was great to see they highlighted this in the investor day.
As of December 31st 2020, there were 2,300 trust and safety professionals working around the world at Roblox, protecting users and screening for inappropriate content. They partner with organisations focused on child and internet safety. Multiple systems have been integrated into the platform to promote civility. Roblox bears a lot of responsibility with the construction of the user base so it’s great to see the continued focus they’re putting on building a safe ecosystem.
Phoebe: We don’t know many details yet but it was confirmed that Roblox intends to roll out a “safe voice chat”. Picking up on Taylor’s point above, safe really is the operative word in that phrase.
If you’re intrigued by these highlights, then here’s the link to the video. We highly recommend watching.
🔮 The future of Roblox
In the S-1 Roblox makes no secret of its ambition to grow and pinpoints four key ways: more money, more users, more tech, and more markets. Let’s have a look through them.
Although revenue has been increasing, Roblox is still a little way off profitability. Now, while that hasn’t necessarily held every company back in the past (looking at you $Snap), it can be a lingering concern for investors. In my view, the point of this section on monetisation is to demonstrate that — even if they don’t grow users that much — they are still able to increase revenue:
- Helping developers / creators to earn more effectively: I personally think this is really interesting, given the huge number of amateur developers on the platform. Given how well free-to-play gaming monetises as a whole (hint: really well), I suspect there is considerable opportunity in guiding these developers to more sophisticated models, helping them — and by extension Roblox — monetise more effectively.
- Increasing conversions of free users to Roblox Premium: The big lure of a premium subscription tier is that it provides recurring revenue, which investors love, as it’s consistent and easy to forecast. Certainly a no brainer revenue-wise although it’s worth remembering that for a large portion of their players you may need to convince the user’s parent, not the user for this. Trickier.
- Working with brands to “build unique marketing opportunities on the Roblox platform”: The wording here suggests that this is more aligned to brand partnerships rather than large-scale programmatic advertising through the metaverse but we’ll have to wait and see. In-game advertising is a growing market and it will be fascinating to find out how Roblox is approaching this.
2) Age demographic expansion
Roblox wants to expand to older users. There are two ways they need to be able to do this: for current users and for new users.
For current users, it’s imperative that the platform can age with the user base. When you look at Xbox, PlayStation, or Nintendo, the same people that bought the console and played those games are buying and playing them 20+ years later.
Beyond this however, there is a clear commercial opportunity by attracting new, older users. You see, the tricky thing about kids is that they don’t have much cash and they don’t have much control over their timetables. The repercussions of this crop up in other aspects of the business — for example, how school holidays are a crucial planning factor for the business “with the highest percentage of our sales occurring in the fourth quarter when holidays permit our users to spend increased time on our platform”.
The issue here is, as said in the introduction, the experience looks exactly like what you would expect a bunch of kids to create. It’s a platform for kids, by kids, with adults supporting that vision. Attracting an older user base requires a shift in content focus, which in itself will probably require an artificial boost as fewer developers/creators will choose to create for a tiny cohort of users, as well as more realistic experiences. Luckily that one’s been covered…
3) Platform extension
Platform extension is essentially improving the technology so they can offer more life-like avatars, more realistic experiences, improved audio features and more. This is a crucial part of shifting new content creation to a broader audience and older users will be looking for graphics and experiences on par with other platforms that they use.
As well as attracting older audiences, it’s also signalled that this will expand the B2B opportunities on the platform, for “entertainment, learning and business markets”. We heard earlier that the coding school was running over Roblox during the pandemic. Could your business be next?
4) International reach
Right now, Roblox over-indexes in the western markets, 62% of users from the USA, Canada, and the UK. The firm wants to grow into other markets and pinpoints two ways to enable this.
The indirect method is Roblox’s language and cultural translation technology. Using this developers can “build experiences in their native language and then, using machine translation and advanced pattern recognition, the Roblox Cloud automatically translates those experiences into 11 languages.” This is further supported by localisation and compliance systems so that developers can meet regional requirements for other locations with minimal additional effort.
Build in one language, play in another!
The more direct approach is also discussed in the S-1 and focuses on moving into the Chinese market: Roblox is expanding through Luobu, “a wholly-owned subsidiary of our joint venture with Songhua, an affiliate of Tencent.”
Watch this space.
But we also see risks as Roblox grows.
⭐️ Further guest analysis from Taylor Hurst.⭐️
Game concentration could threaten the value of exploration on the platform.
While Roblox is considered a platform, the majority of success comes from an incredibly small pool of their top games. ‘Adopt Me’, the most popular game on Roblox, accounts for roughly 23% of the concurrent player base. This is up from 2018 where the top Roblox game, ‘Jailbreak’, accounted for roughly 8–10% of all concurrent users on the platform (Ran Mo).
Roblox defines its growth drivers as social and content but when playtime is concentration on a small number of experiences, these two drivers can work against each other. From a social perspective, players play the games that their friends are playing and since a small portion of games get the most attention, there is a natural concentration of users in specific games.
However, the platform’s core value is as a broad platform for users to explore. When it focuses too heavily on the social components, discovery and exploration drops.
To balance this, we feel it needs a robust game discovery feature, active cross-promotion, or better developer incentives for smaller developers. If de-concentration isn’t a focus in the long run, then it risks looking more like a collection of just a few games rather than a broad and diversified platform.
Child safety needs to go up a gear.
Roblox mentions the safety of the platform for children in three separate “risk factors” in the S-1. According to the filing, 54% of Roblox users are 13 years of age or younger and 67% are minors. This poses huge risks for a platform that emphasises its focus on social features where users are able to seamlessly interact with each other. As of now, Roblox lacks any features to verify a user’s identity and also allows for multiple accounts per user.
As we’ve picked up on before, children are at the heart of this platform. Roblox has done decent work to date on this but needs to be absolutely best in class in the future.
Roblox is awesome. Let’s be clear about that. From a professional perspective, they’ve built an immersive, high value, social platform that will be a staple in the future gaming landscape. From a human perspective, they’ve built a really joyous place where kids want to be; an entire generation is growing up on the platform.
And this brings us to the heart of Roblox: the kid users. They are its greatest strength, but also its greatest challenge. Throughout this analysis, we’ve seen how this user demographic impacts every part of the company. On the one hand, they are what makes the platform innovative and creative. On the other, they will always be a source of massive risk and this risk increases as the numbers grow.
Roblox itself has recognised this and stated their plans to broaden the age range but this takes time. Also, due to the sheer number of child users on there now, there will always have to be additional layers added in to protect these users. While this is absolutely the right thing to do, it will impact speed and innovation and (positive) social networking across different age groups, in a way that other adult-centric platforms do not face.
But at the end of the day, it simply wouldn’t have got where it is without these children, so it’s a small price to pay. And as far as I’m concerned, I still think it’s awesome.