I just skimmed Roblox S-1. As there will be many S-1 teardown and takes on the internet, I only write down high-level thoughts that I still remember without checking the document again. I might put together a simple model and charts later.
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[November 22nd, 2020]
What is Roblox?
Roblox is a User-Generated Content (UGC) platform holder that provides proprietary tools for developers/creators to design, build, distribute/publish, operate, monetize, and analyze applications (called experiences)/digital items compatible to the platform. Roblox is a multi-sided platform that connects users, creators/developers and other stakeholders (influencers, brands… the scope of this depends on the future development of the platform).
With social features, the platform and the experiences on top of it have the potential to enjoy direct network effect. In terms of relationship between users and developers/creators, the platform might have indirect network effect. I have a feeling that those network effects are kicking in but still in the very early stage because the growth is not exponential enough and it’s driven by extreme external event. In addition, we don’t have enough time to confirm the pattern. Even if we confirm the platform is enjoying network effects, its growth pattern might be different from those of carefully selected comps because platforms are not created equal and dynamics nature play important role in real world.
Roblox runs on top of several device-OS-App Store platforms like iPhone-iOS-App Store platform.
Focus on the Supply Side
Since Roblox is a UGC platform, its success is aligned with third party developers/creators. Technology trajectory will follow sustaining technology path. Everything is to assure that it’s easier for developers/creators to thrive on the platform. Investment in supply side ecosystem is indispensable. These investments in technology and supply side ecosystem is like content creation that will eventually attract users so it’s relatively difficult to distinguish this investment from user acquisition cost. Roblox claims their growth primarily comes from organic channel, earned channels and word of mouth. I didn’t notice they mention other additional user acquisition initiatives in the prospectus so I would assume their go-to-market will be as-is.
There’s no contractual restrictions that prevent developers/creators from multi-homing but even if they can make their experience/content cross-platform, their experience/content might not be economically viable as a standalone application outside of Roblox platform. In terms of content distribution, Roblox owns large enough dedicated user base for its developers/creators.
However, if developers/creators can create a well-recognized IP, then it might be easier to make the IP reach other platforms.
It is Roblox that is partially cross-platform (it’s not on Sony PlayStation or Nintendo Switch probably because Roblox doesn’t have much audience on console), not the experience or content on the Roblox platform.
The Business Model
Roblox in aggregate monetizes users via microtransaction on digital content at this moment. Users need to purchase virtual currency, Robux, from Roblox to spend on experiences, enhancements in those experiences or other digital items sold by developers/creators. Users can purchase Robux via one-time purchase or via monthly subscription. Roblox takes a cut when developers/creators exchange Robux for real money with Roblox. The time difference between Robux purchased, spent and exchanged might generate cashflow for Roblox. Generally speaking, this type of business generates attractive cashflow at scale especially when there’s no large spending on user acquisition.
From developers’ perspective, the monetization is not limited to microtransaction. They can adopt other monetization methods depending on the business model of their experience. One interesting thing is that while Roblox takes a cut on digital item transaction but it might not rake monetization method like advertising within experience.
Power law applies to both user side and supply side on Roblox platform. The conversion rate of user base by my estimation is around 1.0%-1.5% and roughly 0.14% of developers/creators earned more than 10K on Roblox platform for the twelve months ended September 30, 2020.
Apparently, expansion in age demographic and international markets are most attractive sources of growth. The user base looks relatively small compared to other leading global social utility providers. If the vision of Roblox is to become a utility, infrastructure or metaverse, then it has a very long runway. However, Roblox doesn’t disclose much information about go-to-market. Roblox has a JV with a subsidiary of Tencent in China but I don’t expect this initiative to take off even though they must spend lots of effort on how to moderate UGC. Roblox reports its doing well in South Korea so maybe Roblox can try more in Japan. I remember Minecraft does quite will on Nintendo Switch in Japan (over one million physical sell-through).
Improvement in monetization is another way to create growth in financial. It can come from improvement in conversion, average booking per DAU, average revenue per DAU (this means Roblox find other revenue streams such as ads…) or collaboration with brands, merchandize…
Everyone company that competing for users’ time and developers/creators is Roblox’s competitor. Therefore, Roblox lists many well-known companies as its competitors. This indicates it has very large TAM (maybe so large that Roblox doesn’t even mention it in S-1).
Simply put, I would say Roblox platform is a combination of software operating system and digital app store (storefront/marketplace) dedicated to a specific category (Roblox calls it human co-experience) on top of existing device-os-app platforms.
If you look at competitive landscape, there are many “games” trying to become a social platform or metaverse. It seems the space is getting more crowed but there’s always a room for an experience platform that successfully leverages cultural or art style stuff (for example anime).
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Slides below might be relevant to this topic.
I joined a Hong Kong listed Chinese game developer conference call last Friday.
I don’t remember most of the stuff discussed but the call gave me an impression that the company believes having technical capability in game engine is kind of competitive advantage.
The management mentioned that some of their high quality game are developed in UE4 and they boast some kind of industry leading position (for example, the first Chinese XXX mobile massively multiplayer online role-playing-game, MMORPG, developed in UE4). Of course, the company also has other games developed in Unity3D and it might just want to showcase their research and development capability because Unreal Engine is known for its deep learning curve.
However, the management’s focus on game engine in the presentation indicates they might not be so innovative on gameplay, game genre or exploring new game business model. The capability of game engine and investment in customized engine might make future game development less flexible (from outsider’s perspective). The organization has tendency to keep iterating what they are good at or familiar with especially when the path is justified by previous large investment (suck costs). We can expect the company’s future game portfolio in terms genre will look quite similar today. The company currently focuses on MMORPG and simulation game (SLG) and it plans to release several games in those two genre but only 1 game in new genre.
There’s nothing wrong with the sustaining technology approach mentioned above. It’s understandable a company’s core competency is only in certain genre which links to gameplay, art style, story setting (IP type) and business model (monetization). The problem of this specialization is that it limits the optionality from other genre. If the game developer cannot explore more gameplay or monetization from genre they are good at, the business is just a pipeline while sometimes the revenue stream might be boosted by a hit. As this developer has established portfolio, it’s better than hit-driven, boom-bust business but there’s less growth potential from the business. Market tends to value this type of company by normal level P/E multiple and maybe with some premium if it’s a leading player.