Hey everyone 👋 — I’m Avirath. I learn a lot from reading S1 teardowns, company analysis reviews, IPO previews. I wanted to share this knowledge with my readers - that’s the motive behind this newsletter.
This article covers a close breakdown of Roblox and their model of business. Roblox shocked people around the world when they IPO’d early this year. What powered such growth? Find out below.
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Roblox started as an educational simulation tool. A simulation tool called Interactive Physics. Founder David Baszucki originally programmed a dashboard for students to simulate friction, mass, motion. According to David, kids used the dashboard for building all kinds of funny models or games. That was 1989. It would lay the foundations for the 90B gaming behemoth that Roblox now is almost 30 years later.
When working on Interactive Physics, David met his later co-founder Erik Cassel. David and Erik grew Interactive Physics and sold it to MSC Software for $20 million in 1998. Post Interactive Physics, both David and Erik went different ways but kept in close touch. The duo, however, missed the work that they did with Interactive Physics. In 2004, the band decided to come back together.
The origins of Roblox could be traced back to the underlying principle of Interactive Physics that made it so popular among kids - they promoted the developer economy. Roblox could literally be viewed as “digital building blocks”.
Roblox’s first game was RocketArena, a free for all fighting arena, where players could come build virtual worlds and play shooter games.
The pandemic and IPO have well powered Roblox’s growth
The months immediately preceding and immediately after the IPO have shown Roblox heavy growth. Last year, Roblox has seen DAU grow by 49, 95, 97 and 74 percent in Q1, Q2, Q3 and Q4. The first quarter of this year has seen DAU grow by 79 percent. These numbers are the highest growth percentages in the past ten quarters. The last five quarters have also seen highest growth percentages by region(divided into US and Canada, Europe, APAC and Rest of World). An interesting metric that shows Roblox’s true expansion is its growth percentages of over 13 age demographics beating the under 13 ones every quarter for the past five quarters. The fact that broader and older audiences are adopting the gaming world is very essential for Roblox to sustain the growth it experienced during COVID.
Roblox has seen explosive top-line growth in the past year. Revenues have risen 140% YoY to 387 million dollars in Q1 2021. However, key North Star metrics for Roblox aren’t revenue numbers but Hours Engaged and Average Bookings Per Daily Active User(ABDPAU). Roblox has seen YoY growth of 100% or more in the last four quarter for Hours Engaged with similar trends being seen region and age wise. The ABDPAU for Roblox has been $10.58, $14.81, $13.73, $17.48 and $15.48 in the last five quarters respectively. Though there has been a significant YoY growth, there was a small quarterly decline in Q3 which can be attributed to the opening up of some countries after the first COVID wave. However, it shouldn't be too surprising if Roblox does not keep up these numbers in the following quarters as the world opens up from the effects of the pandemic.
If the pandemic did something good in the long-term for Roblox, it would have to be exposing the over 13 years demographic to Roblox’s world. After going through their immense growth period, Roblox cannot afford to grow further from only their heavy popularity in the under 13 age group. Fortunately, Roblox has had the environment to assist this new user base growth. It’s called the metaverse.
Roblox sells experiences not games
At the Code Conference in 2018, Brian Chesky(CEO of Airbnb) stated that Airbnb is a community and not just a series of commodities. He iterated that people who misunderstand Airbnb look at it as a series of real estate but what users are actually buying into is their group of 3 million hosts.
Roblox works a similar strategy. Roblox doesn’t sell you a game. Roblox doesn’t release a FIFA type game every year that you spend a one time $100 on. Roblox creates an alternate universe for you to lose yourself in. That’s the metaverse. Take a look at the products that constitute this metaverse.
Roblox Client
The Roblox Client is the game as the user experiences it. Users can interact with more than 40 million games and the fact that it can be accessed on operating systems like iOS and Android have boosted its usage rate and popularity.
Top Roblox games provide virtual environments themselves too. Games like Adopt Me, Jailbreak, Murder Mystery 2, Bloxburg and Royale High are top grossing games on Roblox’s environment.
Adopt Me has had a high of 1.92 million CCU(concurrent users) at a time with the game being played more than 20 billion times as of March 2021(Roblox calls these visits). As of January 2021, Roblox had an average of 500,000 concurrent players. The smart thing that the game does is it enables micro-transactions which empowers developers.
Jailbreak is an open world action Roblox game developed around a police-robber theme. The game was entirely built by independent developers on the Roblox network - Badcc and Asimo3089. The virtual world game that released in 2017 amassed 75,000 CCU in just three day post its release and reached 44 million visits within 3 weeks. Jailbreak is just a brilliant example of how Roblox has created a marketplace for developers and players with almost no interference from Roblox itself.
The example of Jailbreak represents one of the greatest reasons why Roblox has grown so big - Roblox Studio.
Roblox Studio
Roblox Studio is a platform that allows developers and creators to make digital experiences and assets for the Roblox gaming network.
Though game making softwares like Unity existed before, Roblox empowered creators by using Lua scripting language to allow them to develop games and avatar assets much more easily. Their thinking is clear - no one understands what game a gamer would like to play better than a gamer. Thus, they displace the role of game-making from themselves to the gamer/developer community that they’ve built. According to TechCrunch, Roblox’s payment to creators increased from $110M to $250M in 2020. Many of their creators release the games for free and have in-game purchases. Creators are also assisted by providing them templates to start off like Boilerplate, Flat Terrain and Combat.
Every Roblox persona has avatar characteristics that can be customised or upgraded. Avatar upgrade items include head, skin, shirts, hats which have begun to form an important part of the developer economy. Rather than working for longer hours, developers create flashy assets that are easier to code rather than whole games.
Roblox Cloud
Roblox’s growth is driven by its developers. Thus, they focus on providing developers the best of ancillary features possible. Roblox Cloud is one such interesting service that Roblox provides where Roblox helps developers localise and translate assets to regions where Roblox is active. Cloud based infrastructure also helps developers deploy their games on a variety of operating systems increasing their reach.
Robux
Games on the Roblox platform aren’t paid for in international legal tender currencies but are rather transacted in Roblox’s in-game currency - Robux. Robux forms one of the most integral parts of immersing users in the Roblox world. Since users don’t pay in legal currencies but Robux, they’re more sentimentally attached to the value that Robux brings in terms of games, avatar skins, goodies and more.
Roblox sells Robux in primarily two ways - one time options and subscriptions. One time options are sold in the following ways:
$0.99 - 80 Robux
$4.99 - 400 Robux
$9.99 - 800 Robux
Roblox also offers a subscription service where they offer better value for money in terms of quantity of Robux per dollar with other additional features such as discount on games and free avatars. The price listing for it is as follows:
$4.99 - 450 Robux along with available premium only items in the avatar shop and games
$9.99 - 1000 Robux along with available premium only items in the avatar shop and games
At the same time, prices for Robux differ according to the platform they’re offered on. Robux packs tend to have lower value on iOS and Android operating systems to discourage players from purchasing Robux on both operating systems since both iOS and Android stores take a 30% cut from in-app purchases.
Thus, Roblox has created this small universe of their own with an integrated economy which is one of the driving forces of how they create a a strong marketplace where they promote not only game-playing but user generated content. Games like Jailbreak are a beacon of the potential the Roblox platform offers to interested game aficionados.
Creators, China and Metaverse 2.0,
Roblox and Creators
By developing a symbiotic relationship between game consumers and developers, Roblox has certainly benefited from the metaverse like world it has created. However, there are a few hiccups that Roblox may have to get rid of to ensure the smoothest of experiences for their users.
One of the biggest problems that creators in Roblox face is the high popularity of games. Yes, the high popularity of games is harmful for creators. Top games like Adopt Me and MeepCity at times restrict or demotivate other creators developing new games since these games command extremely high numbers of concurrent users.
As seen in the above figure, Adopt Me averages around 275,000 players and Shinobi Life 2 averages around 90,000 players. The graph just goes to show how even the eleventh or twelfth out popular games on Roblox average only 1/10th of the number of CCU on Adopt Me. The disproportionate distribution of CCU and players can lead to a long term drop in number of games created which can stunt creativity and growth on the Roblox network.
Roblox and the difficulties of China
China presents a huge market for Roblox. In 2020, Roblox entered into a JV with Tencent to enter China. According to Niko Partners, the number of gamers in China will reach a whopping 781M in 2025 with a predicted game revenue industry of $55B. Though China can provide Roblox with a user base that is singly greater than it’s total user base right now, China presents tough challenges to Roblox’s growth and the gaming industry as a whole.
To bring a game developed on US or international soil to China, Tencent has to go through a tedious process of getting the game registered with Chinese authorities because of which Roblox is deliberating on the thought of making all games in China being developed by Chinese developers.
Chinese government authorities also tend to scrutinise and vet content published in games to close extents. This forces Roblox to customise and adopt its games to Chinese government requirements which leads to extra overheads.
The biggest problem that Roblox faces is disruption to its metaverse. Like all other products and services, any new service in China faces the problem of multiple clones. Cheap smart labour is available to local institutions who may not live upto the quality of Roblox but do a “good enough” job to draw away users from the primary platform. Roblox’s primary revenue comes from Robux purchases but with clones, this disrupts the economy that Roblox creates around Robux.
Virtual Live Events
The pandemic helped Roblox in more than one ways. Game play time on Roblox increasing wasn’t the only positive contribution. During the pandemic, Roblox hosted several events on their platform like their own version of the Oscars, a musical event called One World(they called Stevie Wonder, Lady Gaga, Camilla Cabello) and several inter-community meet platforms. This can be quite a defining chapter in Roblox’s journey as virtual events become a common occurrence following the pandemic. The metaverse is an immersive experience. To create a true long-lasting social experience, it is important to develop social constructs and replicate society on the Roblox network according to Roblox Chief Business Office, Craig Donato. Several other big names are looking into creating virtual worlds. Epic Games is doing it with Fortnite; Minecraft has already been working in that direction - it’s time Roblox took the lead and do it better than the rest. A much more integrated metaverse with more relatable life activities like concerts, shows, community meets can lead to a complete boost to the already strengthening game platform that Roblox has.
Takeaways for Readers
The gaming industry is far from saturated. The biggest possibility that one can look at is how creator revenues can be protected. Both Roblox and iOS/Android take cuts from the creator’s revenue that leaves game creators with about 20-24% of the original revenue. With the growing popularity of NFTs and token schemes, it may not be long before one finds out a way to ensure greater creator/developer retention.
Roblox’s Metaverse 2.0 idea has barely been explored. The virtual events space needs more than just video calling. Virtual community creation and bonding has been another space that several people have tried to build in but nothing substantial has come up. Roblox’s idea to bring avatar personas to virtual meets seems to occupy potential steam with it.
Final Thoughts
Shakespeare in his “Merry Wives of Windsor” quoted “The world is your oyster”. Roblox is working on providing the average individual that oyster right in their hands. The best thing about Roblox is they don’t fear taking risks. Creating their economy and hoping that their marketplace model to gaming works were large bets that paid off and now are integral components of the Roblox network. With Metaverse 2.0, Roblox is venturing into newer territories which they have the potential to conquer but have certain issues that they NEED to resolve as well. Roblox need to well remember that creators and developers form very essential parts of their system and they have to be treated well.
If you have any feedback or suggestion, do loop it in the comments section. I’ll be sure to take a look at it and even reach out to discuss if possible. You can reach me at avirathtibrewala@gmail.com for any other queries or discussions.