🎮 Roblox - Winning the Metaverse Category

Overlooked #54

Hi, it’s Alexandre from Idinvest. Overlooked is a weekly newsletter about underrated trends in the European tech industry. Today, I’m digging into Roblox’s upcoming IPO. It’s both a gaming platform and a game engine that has grown exponentially in 2020. It’s also my favorite contender to win the quest to build the metaverse - ahead of Epic and Unity.

I first introduced Roblox in this newsletter with the below graph from The Economist. It shows the evolution of hours of engagement per quarter since the platform launched back in 2006. I also highlighted at the time the fact that ¾ of Americans between 9 and 12 years old are Roblox’s users

If you want another graph to show off during your family dinners, here are the top 10 items on the wish list of young American kids. As you can see, Roblox is well positioned ahead of dolls, bikes and computers.

Roblox was founded in 2004 by David Baszucki and Erik Cassel. It’s both a game engine (similar to Unity and Unreal) and a game platform (similar to Epic Game Stores, Apple Store, Valve) with three specificities. The IPO’s announcement was a great excuse to dig into another key contender building the metaverse.

Roblox delayed its IPO in December because of the inability of the financial market to correctly price the recent tech IPOs. The company announced its new plan: (i) raising a $520m round led by Altimer Capital and Dragooneer at a $29.5bn valuation, (ii) going public through a direct listing.

Roblox’s upcoming IPO is the cherry on the cake for a company that experienced a wildly successful year in 2020 at any level:

  • Monthly Active Users (MAUs) increased from 113m in December 2019 to 146m in June 2020 (+29% increase).

  • Daily Active Users increased from 19.1m users in Q4-20 to 36.2m in Q3-2020 (+90% increase).

  • Numerous Roblox games have become huge blockbusters in 2020. In the below graph, I highlight the publishing date of top Roblox games and every time they hit an additional billion of play milestones. You see that most games have passed milestones at an exponential rate in 2020. For instance, Adopt Me! has passed the 10 billion-play milestone and Piggy reached 6bn plays only 9 months after its release.

  • Roblox has grown its user base while improving its monetization which is probably the most impressive achievement. In Q3-2020, a daily active user spent $13.73 on average in the three months in the quarter compared to $9.00 a year before (+52% increase).

  • As a result, Roblox will increase its payout to developers from $100m in 2019 to $250m in 2020.

In this paper, I will cover the following topics to cast a light on the success of the company:

  • Introducing the platform with its key components,

  • Digging into the long and turbulent Roblox’s history,

  • Sharing key reasons to be bullish on the company.

What is Roblox?

Roblox's platform can be divided into two key building blocks:

  • A game engine called Roblox Studio used by creators and developers to create games, social experiences and customization items. Compared to most other game engines, there is a strong ability to switch from being a gamer to being a creator. David often uses the “Microsoft Word” metaphor to describe Roblox Studio: easy to access for beginners but full of powerful capabilities for advanced users.

  • A game client and an app store called Roblox Client used by players to manage their friends' relationships, customize their avatar and access an apps store to pick the next game they want to play.

Roblox is characterised by user generated content and for being a social first platform. On the one hand, Roblox is not a game developer. It only gives the tools to help creators and developers build experiences and craft customized items. On the other hand, all experiences on Roblox are social. I believe that Roblox is much more than a simple gaming platform. On Roblox, people are involved in much more diverse social experiences: they play together, they create together, they learn together, they hang out together and they even work together.

So far, Roblox has mostly been targeting young kids (9-12 years old, both boys and girls) in the United States. It’s also a mobile first experience with 72% of users playing on mobile phones. 

Roblox has become the place to hang out with your friends after school, the digital playground. You will play games but you will also use your imagination to experience certain situations that you may face in your future life (managing a pizza restaurant, surviving a natural disaster, adopting and raising a pet etc.)

There is a certain degree of interoperability across all Roblox’s experiences as they are based on the same game engine, there is a unique economy based on Robux and players have a single avatar that they can customize and use across all games. Robux is a digital currency for in-game purchases. You can get Robux either through a monthly subscription called Roblox Premium or through in-app purchases.

Roblox is built on two complementary flywheels:

  • The content creator consumer viral loop (like Youtube):  the more content you have, the better the platform, the freer you are and as a consequence the more paying users you have and the more willingness there is for creators to add content.

  • The social viral loop (like Facebook but happening simultaneously and not asynchronously): the more friends you have, the better the experience, the higher your willingness to bring new friends on the platform.

A Quick History on Roblox

  • In 1989, Roblox's founders - David Baszucki and Erik Cassel - launched a 2D simulated physics lab called Interactive Physics. It was used by students to craft science experiments. The company was sold in 1999 to MSC Software $20m.

  • In 2004, David Baszucki and Erik Cassel founded Roblox. Interactive Physics was a key inspiration for them as they discovered how powerful user generated content was. They were amazed by the creative experiments invented by students that were going beyond what they could ever imagine.

  • In 2004 and 2005, Roblox was running alpha and beta programs to test its platform.

  • In 2006, the first version of the platform was released.

  • In 2007, Roblox introduced a digital currency to purchase in game and avatar items. The first avatar customization features were also released.

  • In 2008 and 2009, Roblox raised two funding rounds from Altos Ventures and FirstRound for a total amount of $5.1m.

  • In September 2008, Roblox organized a School Project Contest to promote the use of Roblox Studio at school.

  • In 2011, Roblox was released on iOS and in 2014 on Android.

  • In May 2011, Altos Ventures and FirstRound reinvested $4m into Roblox.

  • In June 2011, Roblox added its first social feature with the possibility of following a friend into the game you are playing. Early on, Roblox understood that games would become inherently social experiences.

  • In July 2011, Roblox launched its first TV commercial.

  • In 2012, Roblox passed the threshold of 100k concurrent users for the first time. The company also started to organize events sponsored by prominent third party brands. Roblox started with a partnership with Lego to promote a new toyline called Lego Hero Factory with a special game released on the platform and exclusive Lego virtual items. Roblox has been orchestrating many similar events overtime.

  • In February 2013, Erik Cassel (who was Roblox's cofounder) passed away at 45 y.o. after fighting cancer for several years.

  • In 2013, the company released a Developer Exchange program to let developers exchange the Robux (Roblox's digital currency) earned from their games into real-world currency.

  • In February 2014, Roblox launched its Twitch channel.

  • In September 2014, Roblox launched Roblox University which was an event to push gamers to learn how to develop games and experiences within Roblox Studio with two tutorials to create a racing game and a social murder mystery game.

  • In February 2016, the avatar design was updated from R6 to R15 meaning that you now have a 15-part character instead of 6-part making it much more animated.

  • In March 2016, Roblox was released on Xbox One.

  • In April 2016, Roblox launched a virtual reality version of its product to be compatible with the Oculus Rift.

  • In January 2017, Roblox also raised a $25m round with Index and Meritech Capital.

  • In January 2017, Roblox partnered with toy manufacturer Jazwares to produce toys based on famous characters from the Roblox's universe. The toys are similar to Legos and Playmobil with interchangeable accessories and limbs. Anytime, you buy a Roblox's toys you get a code that can be redeemed for virtual items.

  • In September and October 2017, Roblox organized two events to promote Spider-Man Homecoming and Thor: Ragnarok with special in-game experiences and virtual items.

  • In July 2018, Roblox raised a $150m round led by Greylock and Tiger Global.

  • In March 2018, Roblox released its localization tools to help developers expand their user base beyond English speaking countries.

  • In October 2018, Roblox acquired Packet Zoom, a software to optimize app performance on mobile networks.

  • In March 2019, Nike sponsored an event on Roblox to launch its new AirMax 720 shoes giving free virtual Nike shoes to players.

  • In May 2019, Roblox partnered with a Tencent's subsidiary to create a localised version for the Chinese market. Roblox also launched an avatar marketplace to trade virtual items to customize your avatar which is the character that you will play in any Roblox experience.

  • In July 2019, Netflix sponsored an event on Roblox to promote the third season of Stranger Things by offering promotional codes and giving for free virtual items in limited edition.

  • In September 2019, Roblox organized its first Youtube tournament on Roblox called Roblox Battles with 16 popular Youtubers. The video of the final was viewed more than 3m times. A second edition is currently happening.

  • In February 2020, Roblox raised $150m from a16z valuing the company at $4bn.

  • In November 2020, Roblox hosted its first virtual concert with Lil Nas X promoting his new song called HOLIDAY. 33m people attended the live event beating the number of attendees for the Travis Scott event on Fortnite (27.7m attendees).

  • In December 2020, Roblox acquired Loom.ai - a digital avatar startup which allows you to create a realistic 3D avatar from a picture. It will be an addition to make avatars in Roblox much more realistic.

Why am I Bullish on Roblox?

  1. There are Low Hanging Fruits to Pick in the Short Term

  • Localization: Roblox is expanding its user base beyond the United States. It already has a strong traction in countries such as South Korea, France and Germany. To make this expansion successful, Roblox is building tools to make the content accessible from everywhere. For instance, the top 1,200 games have been automatically translated into the most common languages and Roblox is working to include a native translator to facilitate the communication between players from different countries.

  • Beyond young demographics: actually, there is a strong player churn. After a certain age, kids will leave Roblox and spend their entertainment time on other platforms. Roblox is currently pushing its developer community to build experiences that are more suited for older players to increase their retention rate. It’s working: the 17-24 y.o. category has been the fastest growing segment on the platform.

  1. Roblox is Winning The Metaverse’s Category

  • I introduced the concept of the metaverse in this newsletter when I covered Unity's IPO earlier this year. I wrote that "the basic idea is to upgrade our physical reality with a digital layer that will enable us to make actions that were otherwise not possible".

  • Game engines (Unity, Unreal and Roblox Studio) are enabling the metaverse because they are the common backbone from which multiple games and experiences are built. In theory, you could unify those games and experiences into a single virtual world.

  • In the S1, Roblox explicitly positions itself as an enabler to the metaverse. It defines the metaverse as "the concept of persistent, shared, 3D virtual spaces in a virtual universe". It also explains that the metaverse is close to the category of "human co-experience" that they have built around since the inception of the company.

  • I believe that Roblox is the most advanced player in the construction of a metaverse for the following reasons:

    • Roblox is already going beyond gaming. Many experiences on Roblox are not games but broader social experiences shared with your friends and other people online. You hang out with your friends, you learn new things, you role-play situations that could happen in real life etc.

    • Roblox's client and your avatar are common denominators to all experiences on Roblox. Anytime you want to play on Roblox, you will have to open their app which is a portal unifying all the experiences created with Roblox Studio. Moreover, you have a unique avatar that you can customize and that you will embody across all experiences.

    • There is a Roblox's economy that transcends all experiences. Robux is a digital currency that can be used to customize your avatar with special items and in-game as a currency to make in-app purchases.

    • Digital assets are portable. Roblox has two marketplaces to trade digital assets. The first one is centered around the avatar with 18m customized items that are being bought and sold. The second one is centered around Roblox Studio with 30m assets to make it easier to build a game (models, meshes, textures, scripts, audio clips, dev tools etc.).

    • Roblox is cross platform. You can play on Roblox with your friends independently from the support they use (phone, console, PC, etc.).

    • The switch from being a player to being a creator is extremely smooth. When you download Roblox on your Mac or PC, you install both Roblox Client and Roblox Studio. You only need one click to switch from one to the other. Moreover, the barriers to start creating on Roblox are lower than on any other game engines. In fact, Roblox Studio is built with a no-code layer that you can start with to build your first games and avatar items. If you want to go deeper in game development, you will have to go to the second layer of Roblox Studio and learn to code in Lua.

  1. UGC is Powerful

  • Roblox is built around user generated content. Roblox does not build games or social experiences. The company is focused on crafting the best tools to support developers to build, operate and monetize digital experiences. Roblox has successfully built a community of 7m developers and creators. It's a unique moat.

  • You have differentiated experiences on Roblox because developers are not bound by the constraints of the gaming industry. They don't have to follow magic recipes, to make their game fit in a specific genre, to feel the pressure to make a blockbuster.

  1. Roblox is an IP Machine Generator

  • I believe that gaming will generate the most valuable IPs of the 21st century. In the media business, the panacea is to create a unique intellectual property and to monetize it across different media categories (game, merchandising, book, TV, music, etc.). But it's super hard to build a successful and durable IP. The below graph mentioned the IPs that have generated the most revenues of all time and you see that all of them were created before 2000. You also see that Pokemon is the first franchise. It's an amazing proof of what you can achieve by starting with a game and expanding across other media categories.

  • When you dig into Roblox's history, you see a progressive shift from promoting other IPs within Roblox to promoting Roblox IPs outside Roblox. For instance, in its early years, Roblox did several events with Lego to promote their toys, their movies etc. Now, Roblox is no longer working with Lego (which has even made a partnership with Unity!) and has its own line of toys.

  • Compared to other media, virtual 3D experiences - and especially games - are the most immersive and social category. They are a breeding ground to the rise of new IPs. Roblox's universes will be used beyond the platform to create merchandising, movies, series, books, music etc.

  • Roblox is becoming a key element in our modern culture not only in the 9-12 y.o. core Roblox's demography but also for everybody else - even Kanye West!

Best Resources to Learn More on Roblox

  • 🔎 S1 (Roblox, Nov. 2020)

  • 🔎 Roblox Fandom (Fandom)

  • 🗞 Digging into the Roblox Growth Strategy (Techcrunch, Jul. 2019)

  • 🗞 Investing in Roblox (a16z, Feb. 2020)

  • 📹 Founder & CEO David Baszucki Keynote (RDC 2020, Jul. 20)

  • 📹 Founder & CEO David Baszucki Keynote (RDC 2010, Aug. 19)

  • 📹 DIY Gaming: How Everyone Will Develop Their Own Games in the Future (Slush, Dec. 2018)

Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋