Digital Building Blox for the Future
How Roblox can maintain exponential growth for years thanks to its network effects
Welcome to 2021, a year that has somehow started off even worse than 2020 ended. After a long break I’m feeling refreshed and ready to get back to writing. Despite dozens of potential topics to begin the year (looking at you Visa and Plaid :’(…), I’m going to stick with my guns and continue the series I ended last year with. This week I’ll continue my focus on network effects by exploring one of the most unique and advanced companies that I’m sure most adults are unfamiliar with, Roblox.
As a reminder, network effects are a phenomenon where “increased numbers of people or participants improve the value of a good or service”. An example is Twitter. The more people who join Twitter, the more Tweets there are, which means there is more desirable content, which means more people will join, and so on. Network effects are an important factor to the flywheel of any business.
When I was between the ages of 9 and 12, I spent a lot of time reading, playing outside, and playing video games. I’m sure I remember the time-split being pretty even, but I can imagine the latter taking up more and more time. I played FIFA, Halo, Gears of War, Assassin’s Creed, etc. like all of my friends did. There were a lot of different games, so we always had a cycle.
Today, there are undoubtedly even more games that are available, across a wider array of systems/platforms. But Roblox stands out. *75% of American children ages 9 through 12 play Roblox regularly with friends, according to Roblox*. That is a gaudy statistic, no matter how you slice it. So let’s explore what Roblox is and how it can do that.
Per the site, Roblox was initially founded to “power the imaginations of millions of people around the world”, and describes themselves as the “architects of play”. Roblox is a platform that enables to build whatever they can imagine on its tech stack, and allows other users to engage with the content. While Roblox is primarily known for gaming, there have been countless other use cases for simulations: birthday parties, running restaurants, adopting pets, etc. That content is hosted on Roblox’s Reality Engine, which puts whatever the developers create onto anything from an iPhone 4 to a Playstation 5, anywhere in the world, with incredibly high fidelity. All of this enables the Roblox Universal Game Client, the app that users download on iOS, Xbox, Oculus etc. to play with anyone on any device.
Unpacking the above, there are two core components to Roblox - the Reality Engine and the Universal Game Client. The Engine, simply put, is what makes Roblox go on any device imaginable. It adapts and scales to match the device’s capabilities, despite any distribution issues it might face across an extremely wide user base. The Game Client is essentially the frame of the car surrounding the engine, or whatever is used to facilitate the engine’s capabilities. It enables two people, one on their iPhone and the other on a PC, to experience the exact same Roblox as each other.
What is so interesting about Roblox, though, is that most of the simulations that are enabled are developed by its teen users on the platform. And those teens actually get paid to create these different environments. Schools, camps, and other organizations are using Roblox to teach kids how to code. On top of that, it’s a social network processing over 5 million requests per second. Per Roblox:
Our vision is a single global community, playing together and communicating with each other in real-time, regardless of geographical and language boundaries.
Roblox Chat is always evolving to provide a seamless transition between app and virtual experiences, all while chatting with the same group of friends
Roblox has a global developer community of more than seven million, and that number appears to be continually rising. It also features something called Team Create, which enables groups of developers located anywhere to collaborate in real-time to build experiences together. These developers have earned over $250 million, and actually help contribute to the growth of Roblox, financially and from a user perspective.
All of these spectacular features has lead to Roblox being a maverick in the gaming world and growing extraordinarily quickly. Roblox has 36M daily active users (DAUs) around the world. Roblox generates revenue from 1) customers buying Robux - the online currency in the game client and 2) developers cashing out Robux for real currency. Roblox recognizes deferred revenue, which is a little different that the norm, but makes sense. Despite 67% of DAUs being outside the US and Canada, 68% of bookings - aka the sale and resale of Robux to its users - happened in the US or Canada. Revenue therefore gets recognized based upon the prior period’s booking events and amortized over 23 months (the average lifetime of a paying user), meaning much of the revenue reported is from prior periods’ purchases. So as bookings grow, revenue grows, all else equal.
Bookings will surely continue to grow, because what distinguishes Roblox from most other gaming platforms is that it’s meant to be just as much of a social network as a place to play. With international audiences able to interact across different systems, with or without friends, safely, and engage in chat whenever - Roblox’s opportunity to continue to scale its user base is staggering. a16z framed the platform as Roblox creating a “destination, and immersive world”, which in a time of more and more eyes on the metaverse, is key. a16z’s 6-trends for the future of gaming also highlight how Roblox is shaping the future.
So what does all of this have to do with network effects? Everything. Roblox has three key aspects that drive its spectacular growth due to network effects:
Users will invite their friends to play games with them or participate in activities
Developers will join the platform to create games as a learning experience, for fun, and/or to make money
Users will try their hand at developing their own worlds/games despite not previously being a developer
Just like most every game, it can be the most fun to play with your friends. This is the most obvious of the network effects, but arguably still the most powerful. Especially at a young age, we want to be with our friends and have them like the same things we do. The impetus to invite friends is strong, and Covid-19 has only exacerbated the need for children to play with other children through some medium (enter Roblox). The more children get invited, the more they invite their friends, and exponential growth occurs.
The second network effect helping Roblox skyrocket is the developer community growth. Roblox is a gaming community *literally* built for creators, who in this case, create worlds. That’s quite the allure for any developer, but when you can do it at no cost to yourself but time it’s a win. Especially when you can get paid for it, and pretty handily generate a side-hustle. Some developers make more than $250,000. More developers means there will be more worlds and optionality for users to play and experience Roblox, ultimately spending more Robux. As the pot of spend gets bigger, more developers will join for a share, ultimately adding to the wealth of universes.
The last and most interesting network effect to watch is the frequency of Roblox’s users trying their hand as developers, a bit of a twist on the 6th tenet on a16z’s next generation of games. I think what Jonathan Lai and Andrew Chen get right is that players are going to generate huge amounts of user generated content (UGC), which takes a load off of the team at Roblox and inspires regular vitality. But what I think applies to Roblox that doesn’t quite get covered in the a16z description is the age difference of its users compared to almost all other gaming platforms.
Roblox captures users while they are young, and assuming stickiness of the product, which appears to be pretty strong, users will have years to play and therefore learn the ins and outs of what is possible and desired. They can capture features of new worlds through social conversations, their own pain points, and more, and if they then decide to try their hand at developing, have an ENORMOUS leg up on a potential outsider coming in. That UGC, be it a world, a game, or even a smaller community (say a hyper-localized universe related to a specific small town) can be groomed for years internally. As these younger users all spend more and more time in the game over the years and as more turn into developers, Roblox’s growth can maintain exponential growth because the possibilities truly become limitless and supply could potentially eventually exceed demand. While that may seem like a bad thing, it can be compared to Ben Thompson’s theory on failed businesses on Shopify by just shuffling a few words (Substack doesn’t do strikethrough so replace the italicized words with the bolded).
To that end, I would argue that for Shopify (Roblox) a high churn (game fail) rate is just as much a positive signal as it is a negative one: the easier it is to start an e-commerce business (new game) on the platform, the more failures there will be. And, at the same time, the greater likelihood there will be of capturing and supporting successes.
Summarizing with the riff, Roblox is giving users/creators the opportunity to differentiate their content with bearing no risk if they fail. The simplicity of creation of games and worlds leads to the supplier network effect being true, ultimately making the Roblox experience even better by providing a wealth of different opportunities for the creators and users. This is compounded by the fact that users encourage their friends to play, and cycle between adding users or contributing to Roblox’s creator/UGC flywheel.