Deep Dive: Roblox (RBLX US)
A unique developer base, interesting currency design, and more
Recent months have been quite exciting for the gaming industry. Take Two Interactive announced they were acquiring Zynga, and not too long after Microsoft announces a deal with Activision Blizzard. And just when we thought things were settled, Sony comes out and announces its deal with Bungie in the same month! By now, most investors are aware of the growth of the video game industry (if it wasn’t clear already!)
We decided to publish this deep-dive on Roblox as we believe it is one of the most unique and valuable assets in the gaming industry. Yet, we think the company is not yet well understood. In this report, we go under the hood to deconstruct the Roblox platform, and also detail the transformative changes that are currently taking place. The vast improvements seen in the gaming engine, and the platform’s expanding international presence (~80% of Roblox’s users now comes from outside of the United States) are just some of the things highly worth noting.
To do so, we had the privilege of co-authoring this piece with our friend @DMTCapital, who has experience as both a developer and player on the Roblox platform since 2017 (you can check out his Substack here). We hope this will provide an authentic look at the business from the perspective of someone with a deep first-hand experience of the platform.
Content
Platform Breakdown
Growth opportunities
Business economics
The “Metaverse”?
Management
Platform Risks
Valuation
Platform Breakdown
Roblox isn’t a game. It isn’t a game developer either. Yes. That’s right. Everyone comparing Roblox to Activision, Take Two, Electronic Arts, Ubisoft etc. for the purposes of “Oh look how it’s being valued compared to ATVI!” are barking down the wrong tree.
So what is Roblox? To put it very simply, Roblox is a platform which allows for anyone to experience user generated content in the form of immersive games (which the company calls ‘experiences’), all created using its proprietary game engine known as Roblox Studio. All transactions between parties on the platform are conducted in Roblox’s own currency, known as Robux. In a way, Roblox is a mixture of a gaming infrastructure provider, video game aggregator/publisher, and social platform.
We’ll be looking at the platform from the perspective of three key stakeholders on this platform: Players, Developers, and Roblox Corp.
Players
Roblox acts as an aggregator for all the games created on the platform. From first-person shooters to open-world driving simulators and generic roleplay games, the choice of games is endless. Anyone can create games on Roblox, and there is a long tail of user-generated content on the platform (much like YouTube but for games). Players engage in about 20 of these games on average each month, and a lot of it is congregated around some of the most popular ones. Because the types of games vary considerably, Roblox also offers personalized discovery and search which allows players to find the games that are most interesting and suitable to them.
Most games on Roblox are entirely free to play, which is really good for growing a user base. These free to play games almost always have in-game items which can be bought to enhance user experiences, such as game passes (an example would be a “Police Gamepass” on an open-world driving game like Ultimate Driving). The important detail here is that all these items aren’t priced in USD, GBP, EUR etc. They’re priced in Robux. Robux is sold to players either on an “a-la-carte” basis (1,700 Robux for US$19.99) or through a monthly subscription called Roblox Premium which provides players with a monthly stipend of Robux. We’ll return to Robux later as this is such a key part of the game economy and monetization.
We previously mentioned that Roblox is a social platform too, and that’s something really key to understanding what drives the user base. From a player’s perspective Roblox has much more of a social interaction element to it than any other games.
Expanding on this social element, a key design feature of Roblox that’s important to know is that users have their own single identity, called an avatar. Avatars are a representation of “you” on Roblox that travels wherever you go. Many players change the appearance of their avatars daily, like changing clothes in real life, and spend Robux to purchase clothing and accessories from the Roblox marketplace to personalize their avatars. You can also make friends, message other players and create group chats (subject to privacy setting and/or parental controls), which cements the platform’s status as a social gaming platform for the younger generation.
As we mentioned before, games on Roblox are not created by Roblox. The players are the developers, and the developers are the players. But here, the word developers is used liberally in the sense that anyone can create games on Roblox. No need for a degree in computer science or game design - everything is designed so that one can start from zero. Teenagers are creating games for other teenagers to play, and they know best what’s fun for each other. This gives Roblox a unique ability to adapt as a platform. Roblox is essentially a bet on the creativity and imagination of kids and teenagers to create amazing games for their communities. There is no game development risk taken by Roblox, the company.
Moving on, let’s look at the developer platform in depth, which is one of the most interesting and unique aspects of Roblox.
Developers
Roblox has eight million active developers. The vast majority are just teenagers and younger kids who are just learning to code. They create experiences for others, and do so purely out of their own enjoyment. There are also more sophisticated developers and studios that do it to make real money (older teens and young adults). The typical developer journey is that players start out developing experiences casually when they are young. But as they get older some of the extremely successful developers choose to move on professionally, hiring others and even setting up studios that employs 10-20 or even up to 40-50 people. In terms of how sophisticated the developers are on the platform, it truly runs a gamut.
Roblox Studio, based on the Lua programming language, is where the development takes place. It’s a beginner friendly, yet full-stack development environment that is designed to grow with the sophistication of its users. So even kids can start on it and build simple things like a basic obstacle course with 3D design tool that requires no coding knowledge. Once they become more familiar they then add more complex elements and interactions that require coding. Commonly used game engines like Unity and Unreal take quite a bit of training to use proficiently, and even an avid gamer can’t just pick these up and start creating games on them right away. Roblox Studio lowers the hurdle such that it truly enables people to be both players and developers.
You can think of Roblox as having two simultaneous platforms – in the form of a demand aggregator for players as we discussed in the earlier section, and also a developer platform which we discuss here. Roblox provides the development engine (Roblox Studio) for free to developers, which forms the core of the developer ecosystem. Other key features of the developer ecosystem include:
Community: The annual Roblox Developer Conference (RDC) is a big deal and an important part of Roblox’s developer culture. Lots of hiring and deal making happens between studios and developers here. Roblox also offers an in-house ‘talent hub’ (with currently 2,300 job listings) where developers can find work and recruit others.
Developer Marketplace: Developers can find, purchase, and sell building blocks for their creations including plug-ins, meshes, 3D models, decals, audio and videos. These allows developers to build more efficiently and deliver richer experiences.
Documentation and monetization tools: The developer hub contains API documentation, tutorials, and educational material. Roblox’s analytics tool provides developers information about the performance of their creations (user counts, retention rates, monetization). Developers can also purchase advertisements displayed on players’ discovery and search pages, helping to increase the traffic for their creations.
Earlier, we talked about Robux, and how players use it to buy a variety of things to enhance their in-game experience, such as avatar clothing and game passes. Robux is used by the developers as well. Items in the developer marketplace are quoted in Robux and advertising on the platform is also paid in Robux. In fact, a lot of the times developers actually pay each other not in USD but in Robux! Many developers save up in Robux so that they can have reserves for advertising their future games and to pay other developers. We hope by now it is clear how highly sought after Robux is in the virtual economy, by both the players and the developers.
Developers can earn Robux through various ways: selling their own in-game items and game passes, clothing and accessories on the Roblox Marketplace, and selling things to other developers in the Developer Marketplace. In recent years Roblox also introduced something called Premium Payouts, which rewards Robux to developers based on the time spent in-game by Premium players (players with a Roblox Premium subscription) in their experiences. This allows developers to monetize through their in-game engagement, in addition to selling items to players.
Robux can be cashed out into USD under Roblox’s Developer Exchange Program (DevEx). But most casual developers typically don’t get to do this. First, there is a minimum cash out threshold, and few casual developers actually reach this point (Roblox recently dropped this to 50k Robux from 100k, but it’s still not easy). Second, the conversion spread for cash outs is unfavorable (this is a key way Roblox makes money!). When buying Robux, players pay $0.01176 per Robux ($19.99 for 1,700 Robux), but when cashing out the company only pays at a rate of $0.0035 per Robux. These barriers effectively act as nudges for most developers to just keep Robux within the Roblox walled garden, as opposed to cashing out for real money.
This might all sound somewhat “discouraging” for a developer, but this isn’t a huge problem because keep in mind developers on Roblox tend to be players themselves. For them, the Robux earned in their accounts is Robux which they otherwise would have likely paid real money for anyways. They can use the currency to splurge on any of the constantly growing amount of games on Roblox as a player, any avatar clothing, or even “Limiteds” (as a sort of digital flex on the platform). If they’re savvy entrepreneurs, they’ll “reinvest” the Robux to hire developers or spend on advertisement to potentially boost their sales even further.
What about developers who are doing it to make real money? While there are always some developers that complain, the reality is that the platform remains very attractive. Roblox provides them a large captive base of audience, and very cheap and wide-reaching advertisement slots to reach players. What’s also attractive is the zero startup cost – you get to use Roblox Studio for free, and there is also no storage, hosting, and infrastructure expenses. Compared to more sophisticated development options like Unity or Unreal engines, Roblox is easier and cheaper to build on. The fact that the whole platform is a one-stop solution for developers, and allows them to start with no upfront cost makes it super attractive. Also, Roblox is only taking a cut if the developers are making money, which keeps their incentives aligned.
In 2020, there were 1.3 million earning developers who earned a total of $329m. 1,250 of these developers earned more than $10,000, and 300 earned $300,000 or more. The distribution is similar to other creator platforms - as in most creators make little or nothing, but the rare ones that do have the potential to make big bucks (and at a young age).
Now, let’s wrap up by seeing where Roblox - the company - fits into this whole picture and how the company makes money: