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.
I had no idea that Roblox was so big. Would be an interesting asset to some big-tech players. Gokulram Arunasalam
What the heck are these comments lmao Great articles, thanks
wtf is this article for lol its useless.
You likely have the mental acuity of a shoe
I have two concerns with this prospectus: 1) Non-GAAP Bookings I find their method of Revenue Recognition hard to grasp. Why do they need to carry the revenue as Deferred Revenue rather than recognize it at once, when the Robux is purchased? According to their return policy, all sales are final. I feel this type of Revenue Recognition method will make it hard to get a clear read on the company’s performance in the future and will make investors more reliant on their non-GAAP Bookings metric. 2) Developers are a crucial part of the company’s flywheel but the payout distribution seems skewed to a small group of developers and an even smaller amount seem to make enough off their Roblox endeavors to warrant doing it full time. This feels like a bottle neck. Did anyone else share these two concerns or feel different? If so, please share your thoughts!
Just because a company mentions “parental” and “safety” in their S1, doesn’t mean they are role models in the space — https://www.fastcompany.com/90539906/sex-lies-and-video-games-inside-roblox-war-on-porn “ Roblox presents itself to parents as a safe space for kids. Behind the scenes, it’s waging a technological shadow war against condo games: digital sex parties where kids are flirting with danger.”
WTF did Billy Squier ever do to you?
I had no idea Roblox was so big. My daughters used to spend hours on the platform. I’ll have to see what they do now on the platform (teenagers now). Thanks Prof G…
One platform company you might look at is Bandcamp. They’re doing great stuff in the music industry, at least as far as the creators are concerned. They have a loyal and active userbase, connected through social media (other social media — they realized that creating yet another one wasn’t in their wheelhouse). BandcampFriday has practically become a holiday among musicians and fans — it’s the one day each month in which Bandcamp doesn’t take out their (relatively small) chunk. It gets people revved up for the rest of the month. A lot of labels schedule they’re releases for them. I don’t know how their finances are, but a lot of us love them.
Yes Bandcamp is a great platform. I’ve found many a talented artist on the platform. Bandcamp has been around a while and it’s great to see it still doing what it does best.
Bandcamp is great, but I wish they’d act more like a distro for vinyl releases as the shipping costs have left many of my carts abandoned.
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Great insights, Scott. Thanks!
Woohoo! Children addicted to video games, now clamoring to make money as they do. Trickle-down, exploitative capitalism hits the cradle. Of course the real billions of dollars are for the smidgen of affluent investors behind the platform. And so the celebrity bloviator and his fans cheer it on with lust and envy. All we need now is McDonalds Happy Meals with prizes of Robux inside.
We had to take our 9 year old daughter off Roblox for a couple of reasons. One it was starting to take up all of her spare time (hours per day) and secondly she was getting bullied by a former friend and that friends group. So it’s not all good. She has gone back to self motivated drawing, singing and dancing. The really interesting thing for me was how quickly she got over it, literally the next day it was like it had never existed. It might be her or the age but my thought was that it couldn’t be that good a game or in nouveau tech speak – have stickiness.
We had the same experience here with our 8 year old. She cried for like an hour when we took it away but was totally fine after that and she’s been finding so many safer creative outlets online and offline since then
@Michael N Jordan – A bit of the same here. Our girls are a bit obsessed so we had to set guidelines especially during Covid. It’s tough when this is one of their few social outlets until things “get back to normal”
Great insight as usual, Scott!
Hopefully Roblox won’t suffer from the same issue that the likes of Moshi Monsters (Michael Acton-Smith’s main venture way before Calm) and Club Penguin have, churn. I think the attention window of the customer is small, they grow up pretty quick. It’s a constant battle for new attention me thinks.
Re: “Safety” and RBLX – they had to call it out because they’ve had some serious problems with child predators on the platform in the past. They didn’t anticipate the potential for abuse and are still working to figure out how best to tackle it. To their credit, they’re trying; but its not all sunshine and roses. As a ~20-year veteran of the games industry myself, I’ve seen how fickle audiences can be – as trends change and generations cycle through product offerings. RBLX has a fantastic platform, but so does Minecraft (and a select few other game companies). However any company with only one product is a dubious long-term investment. Very few game companies have been able to string together multiple long-lasting blockbuster products. Its not impossible, but RBLX hasn’t proven their longevity and adaptability and I would be hesitant to invest given the history of the industry.
It’s interesting to see how the market moves so quickly on new technologies/platforms. Zoom is hot today – will it be five or ten years from now? Facebook…yea its borderline a drug company…you get your fix and then you want more. As quickly as these companies can get on the map – they can also disappear. But that’s why they buy their competition, get bigger and bigger (Sinaloa cartel got nothing on Zuckerberg…just kidding Zuck-meister). I’m all for a “free and fair” market but I am not quite sure this is the case with Amazon, Facebook, et al.
sick Church burn. got em!
First of all, Scott, good analysis. Second, for all those whining about how dangerous Roblox is for kids, remember, you’re not raising veal. Instead of hand carrying your children in your arms until high school, let them see the world. They already do, you just don’t know it.
Insightful as always! Thanks Scott Would love to get your thoughts on Ark and disruptive markets.
Don’t sleep on Billy Squier’s Christmas classic – “Christmas is the time to say ‘I love you'”….one for the ages. Thanks for doing the Roblox research; pleased to hear they might care a smidgeon about safety.
While I’m glad the company seems to be taking the threat posed by having an open platform geared towards children presents, the examples I’ve read about abuse, grooming, hate speech, toxic communities, Robux scammers, and other things that go on in the game have led me to conclude this one is not for our family. I agree that the model of dispersed creativity is an encouraging sign for the future, but it will only take a few well-publicized stories before Roblox crashes and burns.
Don’t worry, no Catholic priests allowed.
Two of the best quotes yet: “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)…” and “The world has endured a virus that has levied tremendous damage to the commonwealth. It has also endured Covid-19.” Could not agree more on both points.
“ I hate both“. I suggest you change your attitude or at least your words about family games. Maybe, “ not my first choice” or “ you pick games where you can kick my butt.” You got the idea that playing together is better than whatever game.
Decent post. it would be stronger if you updated it to include Unity Software (U) as the best comp for Roblox. it’s a recent IPO that is trading at over 50x revenue — it’s the primary pure play video game platform that people can invest in (direct competitor to Epic). Unity is viewed as not just a video game developer platform but also potentially the best way to get exposure to an AR/VR platform. so many ways to win! most of their revenue for now comes from a more competitive ad network (shh, don’t tell the robinhood crowd). cheers.
Scott: To be blunt, I think your columns the last few months have seemed, shall we say, hurried. Not as good as in previous months.
I disagree with you David.
David you are correct. he spends too much time in a bubble with Kara. he has become super negative and cynical. still fun to listen to but he lives in a very narrow bubble and drastic negatively impacting the quality of his analysis…
The issue of safety remains a concern with me and clearly others. My 9 year old daughter was in a Roblox chat room not understanding that chat rooms can sometimes be unsafe places for kids to “hang out” since you really don’t know who you’re chatting with and the intentions. Again, she’s 9. There has also been past reporting about “hidden dangers” and “4 dangers” of Roblox. Two of several below. https://www.websafety.com/2018/07/the-hidden-dangers-of-roblox-every-parent-should-know-about/ https://www.protectyoungminds.org/2019/07/23/is-roblox-safe-for-kids-4-dangers/ I’m not yet comfy with it for my girl. Roblox needs to somehow address this but I’m not sure it can ever be fully addressed. That’s the potential “Tylenol” challenge to the brand that I see. Keep up the great content, Scott. Always insightful and engaging. Cheers! Marc
Scott, have you ever read Platform Capitalism by Nick Srnicek? Defines platforms very similarly to how you’re discussing here, and has some additional thoughts you might find very interesting. Very quick read, also.
Thank you Scott for this insightful blog. I took it rather literally this time. My daughter (11) has been rather persistent in trying to convince me of the ‘good’ of Roblox and Robux. In my case, scepsis lead me to block most of her ambitions in this game. Untill today. So you made one little Dutch girl very happy. Thumbs up!
Here is the real lesson I took from this one. “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.”
Dude, I was in the audience in LA 40 years ago when Billy Squier performed at a taping of The Alan Thicke Show (Robin’s Dad). So your edible sentence was very trippy to me
Thanks so much for the RBLX thoughts Have a 7 year old and i am going to buy him some stock to introduce him to the idea of investing. last night had him give me a tutorial on how it works, it all came together with your post. keep up the great work