Roblox and the Dispersal of CreativityDecember 11, 2020
This is the second in a series of posts about one of the most accretive paradigm shifts in our economy since globalization and digitization — dispersion.
The market added half a trillion in value in the past two weeks: AT&T busted a baller move to a rundle, the FTC filed suit against Facebook, and an overhyped DoorDash and underhyped Airbnb went public.
AT&T’s announcement that it will release movies simultaneously on HBO Max and in theaters predictably pissed off Hollywood players, who make millions off the current system. But Christopher Nolan calling HBO Max “the worst streaming service” is similar to JCPenney calling Amazon circa 1999 a terrible experience. Doctors, talent agents, and film directors should host a pity party at Jeffrey Katzenberg’s crib, catered by Planet Hollywood with performances from Robin Thicke and Billy Squier. (Note: you know the moment when the edible kicks in? It happened in the middle of the last sentence.)
AT&T CEO John Stankey realized the market favors recurring revenues and narrative over transactional revenues and EBITDA. Last week, the narrative was AT&T had been on the wrong side of a trade with the smartest man in media (Jeff Bewkes) and overpaid for Time Warner. Ironic that two of the five worst acquisitions in history have the same two words: Time Warner — who 18 years previous merged with AOL. An infirmed stock price is a terrible thing to waste, and AT&T’s underperformance inoculated it against the innovator’s dilemma (Ma Bell has less to lose). So it went gangster on theaters, opting for the consumer. AT&T is poised to recognize an increase of $100 billion or more in market cap in 2021 on its transition from a conglomerate that makes no sense to the world’s largest recurring-revenue firm.
Next up, the FTC and 48 states filed an antitrust lawsuit against Facebook. This formed the second of two dots, the first being the DOJ’s case against Google. Two dots make a line, and that line points towards the end of big tech as we know it. But while it’s tempting to think of these breakups as punitive, they’re actually generative. Antitrust oxygenates the marketplace, and WhatsApp and Instagram will be the next Peloton and Zoom, creating commensurate value. It was telling that this “shocking” news had little impact on the stock. There is only one stakeholder that won’t benefit from a breakup of Facebook, and he’s the most dangerous person on the planet.
Finally, DoorDash, a food delivery firm with multiple well-capitalized competitors, IPO’ed and is now worth $60 billion. Its market cap is almost equivalent to Moderna, the biotech company that created a Covid-19 vaccine in less than a year. One is a warrior that may defeat a pandemic, the other delivers my burrito bowl. One is overvalued.
Airbnb, however, is not. The firm’s offering price was $68, but closed at $144 per share with a market cap of over $100 billion, as I predicted. The company is dispersing the vacation travel supply chain. It has a dominant brand, a global supply network, and a talented leadership team. Bottom line, Airbnb is going public despite the pandemic, while DoorDash is going public because of the pandemic. Which would you rather own when the vaccine comes?
I Platform Therefore I Crush It
Last week, I wrote about the Great Dispersion and the risks and opportunities it offers. One of the forms the Great Dispersion takes is platforms. Platforms are horizontal networks that connect buyers and sellers, speakers and listeners, creators and consumers, to one another, bypassing traditional gatekeepers. (We’re launching a Platform Strategy Sprint in the spring.) The internet is such a platform, of course, and it hosts many others: Twitter and Facebook, YouTube, Etsy, eBay, and Airbnb. These platforms have become the connective tissue for billions of people. They are sub-economies that have become nation-states with market capitalizations greater than the GDP of Honduras.
Building a platform can generate huge returns. In 2000, Amazon launched its own platform, permitting third parties to sell goods alongside Amazon’s own offerings. In 2017, unit sales on Amazon Marketplace exceeded Amazon’s direct offerings and have only increased their share since. In effect, Amazon became a minority player on its own platform, a result that might strike a less innovative CEO as a bad outcome. But Bezos knows platforms, and so does the market. Amazon’s stock has appreciated at 3x the pace of Walmart’s since 2017, as Amazon uses its platform dominance to create scale that is … Amazonian.
Will the DOJ put an end to that dream with a third dot on our line? Or will Bezos inoculate his company against government interference (and further enrich his shareholders) with a preempting spin? My money is on the birthing of an independent organization that will be the most valuable firm in the world in 2025: AWS.
Dispersion of Creativity
There’s another group of platforms out there that don’t just disperse retail, but disperse creativity. Etsy — a pandemic winner whose prosperity is nothing short of inspiring — enables artisans to reach a global audience. YouTube made video stars out of millions, and now TikTok is leapfrogging YouTube in the mobile space. Substack, Patreon, and OnlyFans are likewise disarticulating creators from traditional gatekeepers. It appears algorithms have a better eye for great content than Meg Whitman.
If there aren’t any kids under 16 in your house, you might not have heard of the most exciting creative platform that hasn’t been hauled in front of Congress — Roblox. The firm just filed its S1 and, after reading it, I feel similar to how I felt after reading The Alchemist: inspired and rethinking a bunch of stuff. Roblox is a global gaming platform that disperses game creation tools to millions. And in turn, it disperses the games to tens of millions more. It has 31 million active daily users, 7 million of whom have made at least one game of their own.
There’s massive competition in the video game space. So-called “Triple A” titles such as Call of Duty or Cyberpunk 2077 can cost $100 million or more to produce, and companies pour hundreds of millions more into marketing. Money follows attention, and one firm has more of our children’s attention than any firm on earth. Reread the last sentence.
Roblox commands the attention of America’s kids to the tune of 2.6 hours per day. And it does so with games that largely avoid the violence and dystopia of those $100 million blockbusters. Some of the most popular games on the Roblox platform are about adopting digital pets, building virtual communities, and running a pizza restaurant. The audience skews younger than the traditional video game market as well: 54% of users are under 13.
Unlike Facebook, whose concern for the well-being of kids lies somewhere between Michael Jackson and the Catholic Church (can’t wait for the hate mail on that one), Roblox appears to be run by people who act as if they have children of their own. The word safety appears 121 times in the S1, which is 8x more than in Facebook’s. And the word parental appears six times in Roblox’s S1 and … zero times in Facebook’s. The company employs both filtering software and content moderators, who have reviewed over 68 million digital assets this year alone.
By dispersing tools to millions, Roblox has made money for independent developers and created a flywheel for its own future growth. Nearly 1 million creators earned Roblox’s in-game currency (“Robux”) with their creations, and over a thousand have made over 10,000 real dollars in the past 12 months. 250 of its creators made over $100,000.
While Roblox pays out about a third of its revenues to its creators, what it gets in return is a deep collection of content and a powerful marketing engine, as creators and users share their experiences organically. The company’s sales and marketing expenses are less than 10% of revenue. Facebook spends 14%, and Twitter 26%. Of Roblox’s 830 full-time employees, 79% of them are engineers — making it more of a purely technology company than Apple, Netflix, or Google.
One thing Roblox hasn’t delivered yet is profit, losing $200 million on $588 million in revenue for the first nine months of 2020. But the hallmark of a flywheel is momentum, and Roblox is spinning up fast. Prepaid revenues were $1.2 billion in the first nine months, and are growing 171% year over year. Negative working capital is a concept I understand well enough to know it’s awesome.
Roblox could be to Facebook what Shopify is to Amazon, the non–social media social media firm. Just as hospitals, doctors offices, headquarters, shopping malls, and campuses are being bypassed and shifting hundreds of billions in stakeholder value, Roblox could disrupt the kid attention economy. Roblox is set to go public this month, and will create meaningful shareholder value. Prediction: stock trades up 70% or more on first trade. More important, Roblox could be the first social media firm whose shareholder value isn’t designed to extract value from the least powerful stakeholder, kids.
Facebook and Roblox. One firm is being broken up, the other going public. The world has endured a virus that has levied tremendous damage to the commonwealth. It has also endured Covid-19. Roblox will be a great stock and, more important, might pull off a jailbreak from the menace economy of big tech, which arbitrages depression, desperation and dissent. I’m playing Piggy and Hide & Seek Extreme. I hate both. However, my 10-year-old son seems to genuinely enjoy teaching me how to play, and that’s enough.
Life is so rich,
P.S. On the pod this week, I spoke to Dambisa Moyo, a global economist and bestselling author, about macrotrends post pandemic. She compares this period to the years after the Gilded Age, which I found interesting. Have a listen.