ROBLOX's $30 Billion Dollar Bet! - Why You Should Care About ROBLOX Going Public - Extra Credits

What if I told you that one of the most popular games in the world has more than 36 million players log in every single day? Now, am I talking about Fortnite, Call of Duty, League of Legends, maybe World of Warcraft? No, this game has more daily users than all of those combined. We are talking about Roblox, and what it's about to do is going to affect an entire generation of gamers. Thanks so much to Brilliant for helping Extra Credits stay sharp. Now, if you're not a tween or a teen, or don't have any in your family, you might not have ever heard of Roblox. And of course, if you do have a teen or tween in your family, you might not hear about anything else. For the uninitiated, Roblox is an online platform powered by user-created games, or experiences, as they call them. And this focus on user-generated content boasts them more than, let's see here, 12 million games, or experiences, excuse me, made by their community. And this is by far one of its

biggest accomplishments, because Roblox has created authoring tools robust enough to build a variety of games, but intuitive enough for a tween to use. And the last few years have been good for Roblox, like really, really, really good. It's become a social destination, a place for more than a decade where kids could hang out with their friends online and play together. Then of course, you roll in the pandemic to the mix, and the combination of Roblox's reputation with parents as a safe place for socially distanced fun, and lots of kids stuck inside, of course, dramatically grew its user base. In fact, by September of 2020, Roblox hit that 36 million daily active users mark, almost tripling what it was 2 years ago. But here's the kicker, at this point, a staggering 75% of kids in the US between the ages of 9 and 12 play Roblox, with the average user playing for more than 2 and 1/2 hours per day. Move over, mouse. That's a huge amount of influence. Also noteworthy is that Roblox's free-to-play nature makes it easy to pick up and it's run by people who actually seem to care

about kids. Their in-game currency purchasing is non-predatory. Their IPO filing lists the word safety 121 times and they employ 1,600 full-time people who work to eliminate inappropriate user-generated content. And speaking of that content, players can spend Robux, that is of course Roblox's currency, inside of user-created experiences. And then Roblox gives a cut of that revenue to the experiences creator, which in reality is no chump change. The Roblox developer community earned around $250 million in 2020 with three of its developers reportedly having made more than 10 million each. Yeah, bud, we're in the wrong business because this has created a core loop with strong momentum. More Roblox users means more revenue, which means developers creating experiences make more money, which in turn attracts more developers to make more experiences. But, this doesn't mean that Roblox is profitable. Like many tech companies, Roblox is spending more than it earns to

help fuel growth and acquire more users. And as its revenue has increased, its losses have also widened. For instance, in the first 9 months of 2020, Roblox spent around $800 million in operating costs, but only made around $600 million in revenue, which is why some companies decide to go public, allowing not just private investors, but anyone to buy a part of the company. This, among other things, lets the company sell shares to pay for future growth and cover costs until they're profitable. And when Roblox goes public, and they are, the current company valuation will be 29.5 billion dollars based on the last price private investors paid at the time of writing this episode. Oh, and by the way, that is seven times more valuable than they were last year. But, you know, the funny thing about investors is at some point the people who invest in your company would most likely want to make money on that investment. And by going public, Roblox is transitioning from a privately owned company to a public one

whose responsibility will now be to make money for their shareholders. Hey there, fiduciary duty. So, precedent would dictate that Roblox is going to need to become profitable soon, and I think you see where we're going here. But, more money might be hard for a plethora of reasons. For instance, their current audience doesn't have credit cards and are usually spending mom and dad's cash. So, if Roblox decides to implement a more aggressive monetization strategy, that could lead to a worse user experience and shake parent confidence in bankrolling the hobby. Plus, philosophically, Roblox isn't a company used to trying to squeeze every last free-to-play dollar out of its audience. So, the tone would feel different if they moved in that direction. Along that line, adding new users might also be difficult because, as we mentioned earlier, Roblox has grown to encompass 75% of the US tween population, in part brought on by the pandemic. And as the pandemic subsides, fingers crossed, they're likely to lose users as kids would regain the opportunity to go outside, visit friends IRL, and do other

activities. In fact, even Roblox themselves has publicly stated that, quote, "We do not expect these activity levels to be sustained, and in future periods, we expect growth rates of our revenue to decline." So, there's that. Though another path to additional revenue would be expanding into new regions, which actually they're already in the process of doing. For instance, Roblox has already signed a deal with Tencent to have a version of Roblox come out in China. And putting aside if that's good or not, expansion brings additional costs for things like localization, regionalization, and country-specific content moderation, all while Roblox is currently losing money in the US. So, moving to territories with less valuable currency may be good for growing the user base, but might not necessarily be great for growing profit. Finally, Roblox is also working to expand their appeal to an older teenage audience. And while this would assuredly expand the number of users, it too isn't without risk. An older demographic means additional need for content moderation, as what's appropriate for a 15-year-old

most likely isn't appropriate for an 8-year-old. And age expansion could also worry parents who might be less eager to have their kids on Roblox. So, that could mean that they risk losing their focus, becoming good for more people, but not great for their original core audience. And for a little anecdotal perspective, in an informal poll of his 8- to 12-year-old nieces, nephews, and their friends, our studio director Jeff found that none of them were excited about more big kids, as they called them, coming to Roblox. They like how it is now, and are afraid that the games that they play might be harder to win if teenagers are playing as well. So, what does this all mean? Well, quite a bit for an entire generation of people who play video games, and will probably continue to do so throughout their lives. And we can't think of a game for kids with this large a demographic that has ever changed the fundamentals of how and why it makes money. And look, we don't want to be alarmist here. This could all go fine. Roblox is taking a calculated gamble that they can overcome these risks and external pressures. The

expansion of audience, regions, and cash from going public are all aimed at turning their tween-centric platform into an even bigger social space. And going public could also go a long way toward funding their founders' long-term dream of turning Roblox into the type of collective digital reality popularized by sci-fi writers like William Gibson and Neal Stephenson, which of course could be awesome or a dystopian nightmare, depending on your point of view. So, yeah, it's safe to say that we're living amidst some pretty interesting times in the gaming space. And of course, we don't know how all this is going to play out. But we did feel it was an important topic to discuss because, not to put too fine a point on it, Roblox is the game that's shaping how a generation will interact with our favorite medium. So, whether you're hopping aboard the stonk train when Roblox goes public, choo choo, or just want to be up-to-date on how your kids' pastime will interact with your wallet in the future, let us know your thoughts on all of this in the comments below. Because no matter how this shakes out, it has the potential to affect the gaming space for years to come. So, we should all be paying attention.

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