Roblox: Gaming, the Creator Economy, and the Metaverse

9 min ago

Dear subscribers,

Roblox is a company that sits at the intersection of gaming and the creator economy. Naturally, I have to do a deep dive.

Great games are expensive to make. For example, The Last of Us Part II took 2,000+ developers six years and $100M to ship (source). But what if the players themselves could craft the game?

This idea isn't new. Some of the best games come from players "modding" existing titles (e.g., CounterStrike was a mod of Half-Life). Yet Roblox has taken this to the next level because:

Almost all of Roblox's games come from its 8M creators.

Let's explore:

How Roblox works
What Roblox offers creators
How Roblox is building the metaverse

How Roblox works

Most people see Roblox as a game, but I see it as a 17-year old creator economy company:

Creators use Roblox Studio to craft avatar items and games.
Players use Roblox Client to customize their avatar and play a creator’s games.

Like other creator economy companies, Roblox grows through two loops:

Creator growth loop: Creators make money, attracting more creators.
Player invite loop: Players invite friends, attracting more players.

Roblox grew rapidly during the pandemic. Source: The Economist

These loops have helped Roblox scale to 8M creators and 43M daily active players (source). Over half of these players are under 12 years old, and 72% play on mobile (source). Basically:

Kids are hanging out with their friends in Roblox instead of on social media.

I spent some time playing Adopt Me, the #1 game on Roblox. Blocky graphics aside, the game is a surprisingly sophisticated simulation of raising a virtual pet:

In Adopt Me, I decorated my house, bought food for my puppy, and interacted with other players.

Adopt Me has 64M monthly active players (source). That's only 16M less than Fortnite's 80M MAU (source).

What Roblox offers creators

"We learned very early on that our creator community is vastly better than we are at making just about anything...what we need to do is just unlock the barriers."
- David Baszucki, Roblox CEO (source)

So creators on Roblox must be making a lot of money, right?

The answer is: Yes, but only a few.

Like other creator economy platforms, only a tiny percentage of Roblox's 8M creators earn enough to make a living (source):

1.25M creators made some money.
1,250 made more than $10K.
300 made $100K or more.

In total, Roblox creators made $329M in 2020. While impressive, these payouts pale in comparison to Roblox's annual revenue ($920M) and the payouts from other leading creator economy platforms (e.g., Patreon's $1B).

So what’s going on? First, let's recognize that Roblox does a lot for creators. If we apply the creator hierarchy of needs:

In Roblox Studio, creators can find thousands of items from other creators to copy into their games.

Publish: Roblox Studio lets creators make everything from simple avatar items to complex virtual games.
Grow: Roblox puts a creator's content in front of 40M players via Roblox Client’s avatar store and game discovery algorithms.
Monetize: Creators make money when players purchase avatar and in-game items using Robux (Roblox's virtual currency). Roblox also pays creators based on how much time its paid players spend in each creator's game.

Yet, for every dollar a player spends in a Roblox game, the creator only keeps ~$0.25:

In a time when creator economy platforms are competing to offer lower take rates to attract creators, Roblox’s 75% take rate is an outlier.

So why does Roblox take so much?

The reality is that running a platform with millions of virtual worlds is expensive. Roblox's breaks down its 75% take rate as follows (source):

25% goes to App Stores and payment processing
22% goes to Roblox platform hosting and investment
27% goes to cover Roblox's operating costs

Is Roblox also making a profit off of the above? I don’t know. But the company had -$206M net income despite earning $920M revenue, so I’m inclined to believe the above chart.

Regardless, I think this presents a graduation problem for Roblox’s top creators. Why would they continue to make Roblox games with 25% revenue share when they can move over to Epic or Valve and keep 88% and 70% of their money? Perhaps it’s because Roblox’s creation tools are just plain fun to use, or perhaps it’s because top creators have already built large communities on the platform. For its part, Roblox is focused on giving creators more earnings (e.g., with its licensing and merch program).

How Roblox is building the metaverse

This metaverse has gained a lot of attention recently, with everyone from Epic to Facebook to crypto startups claiming that they want to be a metaverse company.

In Roblox’s vision of the metaverse, you can:

Be whoever you want to be (identity).
Build relationships with anyone (friends).
Lose yourself in a 3D virtual world (immersiveness).
Feel like your closest friends are next to you (anywhere).
Explore millions of worlds (variety).
Teleport anywhere instantly (frictionless).
Make a living (economy).
Interact in a safe and civil environment (trust and civility).

Roblox’s definition of the metaverse has 8 investment areas

What excites me about this vision is that it goes beyond gaming as entertainment. Roblox wants to empower creators to build "games" to help people:

Learn together: e.g., Explore ancient Rome.
Connect together: e.g., Experience a new culture.
Work together: e.g., Work in a virtual space with coworkers.

Roblox’s vision brings games to other categories

It's easy to dismiss Roblox: "The graphics aren't great." "The company is losing money." "Kids will grow up and stop playing it."

It's also easy to claim that your company is all about the latest trend - creator economy, NFTs, metaverse, and more.

But Roblox has been quietly building the metaverse for 17 years, taking a creator-first approach from day one.

That makes it special.

In my next post, I plan to interview a Roblox product lead to get an insider’s perspective.