Roblox's Growth Strategy
A deep dive into Roblox's growth strategies: historical growth patterns, their future growth strategies and their long-term vision of building the metaverse.
Roblox's Growth Strategies and Why Becoming a Metaverse is a Bad Idea
If you aren't under the age of 13, there's a high chance you haven't heard of Roblox.
Roblox is an online, multiplayer gaming platform launched in 2006 which allows players to create games and play games created by others. To date, Roblox has over 50M different games.
While free-to-play, cosmetic and in-game additions are available in exchange for "Robux", Roblox's site-wide currency. Players can earn Robux through a one-time payment or through a monthly subscription called Roblox Premium. Additionally, players can re-sell items, trade or monetize their games in order to receive more Robux.
The games found on Roblox are created both by individuals as well as professional developers. To incentivize development, Roblox offers game developers the ability to exchange Robux they've earned for USD (more on that later).
Roblox was initially set to IPO in November 2020 but had pushed its IPO on NYSE to March 10th, 2021.
In order to understand how Roblox plans to become the metaverse, it's important to first understand exactly what a metaverse is.
According to the dictionary.com definition, a metaverse is a "3D virtual world, especially in an online role-playing game". The term is most commonly referred to as the convergence of VR, augmented reality and the internet. Essentially, it stands for a second, 100%-virtual in which we everyone can interact with each another. Think about it as a digital replica of the world, except you can be a completely different person.
Is Roblox really planning to build a metaverse? Before answering this question we'll need to analyze both its past growth and future growth strategies. We will then analyze how Roblox plans on becoming the metaverse.
The analysis will be broken down into three parts:
Roblox's Historical Growth
Roblox's Future Growth Strategies
Roblox's Long Term Vision: Become a Metaverse
Before diving into the company's historical growth, I want to begin with a personal anecdote.
I joined Roblox on the 15th of January, 2010. As a kid, I was obsessed with the game and would play it for hours on end with my friends.
Looking back, Roblox taught me a surprising amount of things: I learned the basics of doing business from selling graphic design in exchange for Robux. Roblox was also my first introduction to coding as the first programming language I tried to learn was Lua, the language behind Roblox's games.
To give you a perspective of what the game looked like back then, here's a comparison what the website looked like in 2011 vs today.
Roblox in 2011
Spot the differences.
1. Roblox's Strong Historical Growth
Explosive Growth Since 2017
To say that Roblox has undergone a transformation since I last played it is a vast understatement. Over the last decade, Roblox's user base has increased by 4131%. To put that figure into perspective, Roblox went from 70.9M hours logged between January-July 2011 (Roblox Blog) to over 3 Billion hours logged in July 2021 alone (The Economist).
More recently, Roblox has been experiencing a period of explosive growth. Between 2018-2019, Roblox increased its DAU by 42% (S1). Between 2019-2020, Roblox nearly doubled its DAU growth rate to a staggering 81% (Roblox S1).
The Growth Flywheel
One of the reasons why Roblox has seen such explosive growth is because of its business model. The company primarily makes money from users purchasing Robux. Developers on Roblox make money by exchanging the robux they earned into USD. This model creates a tremendous incentive for game developers to continue to expand and develop their games (in order to acquire more Robux from players) and for Roblox to add features for the developers (so more users will come). This incentive structure has created a flywheel effect for Roblox's growth, enabling it to continually grow without additional stimulus required by Roblox.
As Roblox sees more daily-active-users (DAU) and monthly-active-users (MAU), the company will see an increase in revenue. The increase in revenue will enable Roblox to better their developer exchange program and incentivize more developers to join the platform. With more professional developers on Roblox, players will be given a larger variety of well-polished, professional games to play for free, continually increasing Roblox's DAUs and MAUs and so forth.
Success at Scaling
Beyond the growth flywheel, Roblox's earnings and balance sheet also show tremendous success at scaling. Roblox's revenue was up 68% year-over-year (YOY) to $589M for the first 9 months of 2020 (Roblox S1)
The company's operating income was of -$206M, but it has a positive free cash flow of $293M with a free cash-flow margin of 50% (S1). Its biggest cost was payment processing fees.
The difference between GAAP earnings and cash flow is mainly driven from the company's deferred revenue of $1.3B (S1). This large amount of deferred revenue stems from the accounting of its bookings: bookings are realized over the average lifetime of a paying user (23 months).
"Substantially all of our bookings are generated from sales of our virtual currency which we record as deferred revenue and then recognize that revenue over the estimated average lifetime of a paying user." - Roblox S1
In addition to this, Roblox has a healthy balance sheet with $801M in cash and no debt.
Combined together, Roblox's positive cash-flow, high DAU growth rate and healthy balance sheet show a company succeeding at scaling. It is no surprise to find negative profits but positive cash flow in a scaling business, however Roblox's impressive $1.3B in bookings and its ability to double their DAU growth rate over the last 2 years shows an above-average ability to grow at scale (Roblox S1)
Extreme Popularity Today
As a token of their success at scaling, Roblox is extremely popular among today's youth: two-thirds of all U.S kids between the ages of 9 and 12 years and one-third of all Americans under the age of 16 play Roblox (Bloomberg). According to its S1, Roblox has over 31M daily active user (DAU).
Not only is Roblox hyper-popular among today's youth, it also commands more attention than any other social media and/or game, to the attention of 2.6hrs per day.
Roblox commands more of childrens' attention than any other company in the world.
Maintaining such an impressive growth track record may be prove hard to do for Roblox. However, the company has a very ambitious growth plan.
2. Roblox's Future Growth Strategies
Like any other ambitious company, Roblox is pursuing a lot of different avenues for growth. Their main growth strategies have been outlined below, and I've ranked in terms of importance (as I see it).
Improving Developer appeal (Growth Flywheel)
While Roblox has not clearly outlined exactly how they aim to pursue each strategy, I've listed some ideas as to what I believe is the best way for them pursue each of the strategies is. Following this we will look at how Roblox wants to grow by becoming a metaverse and why that's not an idea worth pursuing.
Kids around the world today are more similar than ever before. As such, one of Roblox's most lucrative opportunities is to expand internationally such that they can continue to grow and drive the Roblox economy forward.
The biggest issue Roblox faces with international expansion is translation. Because Roblox is text-based game, the ability for players to understand each other is a crucial requirement of the game's success.
Roblox is already working on a solution to ease cross-cultural communication: they are building machine learning algorithms to translate text across languages in near real-time. The difficulty in this solution lies in scale: with millions of games and even more players, such an endeavor requires serious infrastructure. Moderation across languages will also prove to be a very difficult issue to solve for.
"We want to make it work automatically for our community … It [will be] a mixture of employing machine learning, crowdsourcing, and traditional methods, and trying to blend those technologies,” says Walshaw-Vaughan. That’s “Across millions of games. That’s a big, huge problem to solve.” - (Techcrunch)
Even though the issue of translation has yet to be resolved, Roblox is already moving forward with their plans of going international. On the 28th of May, 2019, the company announced that it would form a "strategic partnership" with Tencent, the Chinese multinational technology conglomerate (Roblox IR). The aim of the partnership is to bring LuoBu, Roblox's Chinese equivalent, to mainland China. LuoBu is also partnering with the China Association for Educational Technology (CAET) to create programs for young Chinese students to learn the principles of coding through Roblox. Beyond just being a game, the LuoBu version of Roblox seems to also be an educational platform.
Penetrating the Chinese market is an important step for Roblox. With over 84M kids between the ages of 10 and 14 and a rigorous education system, Roblox's ability to combine both learning and gaming may prove a success in China.
China will prove to be an excellent first step for Roblox’s plans for international expansion, especially if it wants to continue growing at their historical rates. The Chinese market will also enable them to reach more game developers, helping to spin the growth flywheel even faster.
Improving Developer Appeal (Growth Flywheel)
As mentioned above, I believe Roblox has a tremendous flywheel effect when it comes to growth, as observed with their high historical growth. Evidently, it cannot be neglected as a potential source of future growth. Roblox needs to lean into it and continue to better their developer exchange program and add the features developers are asking for.
Doing so amplifies their growth flywheel effect and ensures that new, professional games are developed on their platform. Having more developers on the platform would also yield more variety in games, which may appeal to different demographics (more on that later).
Here's what Roblox is currently doing to improve their developer appeal:
75% of Roblox's engineering team is focused on increasing performance to allow for larger, more technically-impressive games as well as new lighting engine (Techcrunch). This seems to be a feature which game developers have been asking for as they look to create more expansive and better-polished games.
Roblox is also focusing on attracting smaller, 5-20 person video game studios that may have failed to develop commercially successful games on other, highly-competitive platforms such as the IOS App Store (Techcrunch).
To date, Roblox has done a good job at appealing to developers: there are currently 2M professional developers on the platform, of which 960,000 earned money from the developer exchange program (Roblox S1). 32 of them earned over $1M.
In order for Roblox to stay relevant and retain the users it has, it needs to continue to attract developers and create a larger gaming ecosystem.
One of Roblox's current limitations is that the game caters heavily to kids aged 10-13 years old. In fact, 54% of players are under the age of 13 (Scott Galloway). In order to grow, the company can make its game offerings more appealing to a larger age-range.
Expanding the range of its target age-demographic can be done through the first growth strategy we explored, improving developer appeal. Roblox can incentivize developers to create games for a higher range of ages by developing the necessary features or improving the Dev-Ex program for developers catering to an older audience. For example, Roblox could give a small, flat payment of Robux upon completion of games skewing to an older audience.
Attracting additional developers will inevitably create a larger variety of games. That being said, with the Coronavirus still in full swing and children of all ages forced to remain at home, Roblox has a tremendous potential to grow its player-base during the pandemic. Creating these short-term incentives could mean that Roblox has the games it needs in order to market to an older demographic.
With the 3 short-term growth strategies outlined above, let us now explore Roblox's long-term growth strategy: becoming a metaverse.
3. Roblox's Long-Term Vision: Become a Metaverse
Roblox is open about its vision of building a metaverse. In the S1 the company states that "the metaverse is materializing" and mentions the term "metaverse" 16 times. Additionally, Roblox's CEO, David Baszucki, has been a very vocal about the idea of Roblox becoming a metaverse (VentureBeat).
“Our hope is the metaverse doesn’t just look like reality [...] It feels like reality so that the cars in the metaverse have engines and they have axles and they have wheels. When the wheel falls off the car, the car does what we would expect in real life. So part of this hope of a physically driven metaverse is actually easier to program and easier to create emergent behavior because it kind of works like we expect.” - Venturebeat
Roblox hopes to build a metaverse through user-generated content. That is, Roblox aims to create the platform on which people can build the metaverse. Their creator community will be the ones actually building it (VentureBeat). He dreams of a world in which people have a physical identity and a digital identity which people will balance.
“People will know they have a physical identity and a digital identity [...] just as people that are very facile with books and videos and balancing them, we’re optimistic they will be with the metaverse as well" - David Baszucki
Beyond kids and teens hanging out in virtual high schools, the company hopes that it will grow to encompass teens and adults as well, such as adults going "to work" in digital versions of their offices. Could Roblox become the hybrid "work-from-home" model of the future?
In my opinion, no.
Roblox is without a doubt good at what it does: enabling and sharing user-generated content to a wider audience. I do not think that working to build (or enable) a metaverse is the right strategic-approach for Roblox. When making strategic decisions, it's important to leverage your unique attributes to build a defensible "moat" such that you can command near monopoly-power within your market segment. I do not believe that Roblox focusing on building a metaverse is them building a defensible moat. My reasoning goes as follows:
Firstly, building a metaverse is wasting resources. While there is an argument to be made for backend infrastructure that allows for larger servers, creating a metaverse in which all players can be together requires infrastructure Roblox does not have. Roblox already owns its own cloud system, giving them a unique advantage over all the gaming companies who rely on AWS and other third-party servers. Roblox needs to continue to focus and develop those capabilities but does not need to go so far as working to enable a metaverse.
Secondly, I do not know of any demand for a metaverse. While I am familiar with the dubiously attributed quote of Henry Ford, "If I had asked people what they wanted, they would have said faster horses", I believe that even if presented the option to join a metaverse most people would choose not too. With the average individual already spending over 2hours on social media, I highly doubt anyone would choose to spend even more time in an entirely-virtual world (Techjury). The coronavirus pandemic has already highlighted the negative effects of spending too much time in front of a computer for a lot of people. I highly doubt that anyone but gamers will be looking to spend even more time in front of a computer in a post-pandemic world.
As Roblox IPOs, it's important the company hones in on a clear vision and focuses on its strengths. I do not think that building the metaverse is the right vision. Instead, Roblox should continue to expand its base of players and developers. I see Roblox as a one-stop-shop for all types of video games rather than a metaverse. For now, I'll stick to chatting with colleagues on Teams, not Roblox.