One of the first lessons taught in business is diversification. Spread your risk around so you don’t blow up on a single idea. The gaming industry is no exception. Game developer Take Two Interactive and big tech Microsoft are in acquisition mode in the gaming space. Indeed, there is massive interest in the future of gaming.
But are all “gaming” companies created equal? In my opinion, Roblox is a misunderstood company. It’s not a game or a game developer. It’s a platform, or a gaming service provider if you will.
Recently Venturebeat.com published an interview with Craig Donato – Roblox Chief Business Officer. Craig answered questions on the metaverse and the state of online gaming. To be sure, Craig’s confidence in Roblox is off the charts, regardless of recent stock price weakness.
Brent Donnelly’s am/FX daily note highlighted a piece by Value Punks on the future of Roblox. If you are pondering the idea of a long-term investment in Roblox, this deep dive is well worth the time.
What is Roblox anyways?
- gaming infrastructure platform
- game development engine (Roblox Studio)
- in-game currency (Robux)
- it’s social too
In a nutshell, Roblox is a mixture of gaming infrastructure, video game publisher and social platform.
Gaming infrastructure (games played here)
Roblox is the platform where gamers come to play games. Sounds simple, right? But, here’s the twist. All Roblox games are created by users, not game development companies. In fact, there are about eight million developers and the vast majority are kids who are just learning to code. So, users don’t have to create games, but they can if they want to.
For example, imagine a group of kids at school create a game to play at recess. It’s super fun and captures their imagination. Little Jane speaks up, “Hey guys, wouldn’t it be cool to play this game on Roblox?” In no time, Big Tim, the creative one, designs his version of the game using Roblox Studio. From that point on, the possible creative outcomes are boundless.
Roblox Studio (games made here)
Roblox Studio is the game development engine used to create games, or experiences. It’s based on the Lua programming language and is completely free to use. Roblox Studio facilitates game development without the requiring the user to pay out of pocket, its free! Of course, YouTube has endless tutorial videos so anyone can get started creating experiences for their communities. Just like Big Tim.
Zero start up costs. No storage, hosting, and infrastructure expenses.
Robux (revenue generation)
All transactions on the platform are conducted in Roblox’s own currency, know as Robux. Robux is sold to users and priced in USD. Roblox sets the price and offers subscription deals too. Better yet, developers use Robux to pay for game development. Likewise, Avatar customization is a popular driver of Robux sales, along with all games these days.
Certainly, the story of Roblox feels unique compared to traditional game development companies.
Social
From a players perspective Roblox has a unique social interaction feel compared to other games, at least in my opinion. Users can make friends, create group chats, and enjoy spatial voice to up the social fun level.
Economics and Investment Potential
The optics here are simple. First, establish a user base and then diversify across demographics, or aging-up as it’s called. No doubt management is on the ball. For one thing, 17 to 24 year old’s now account for 20% of all users and up 51% in the forth quarter compared to last year.
By the same token, the key driver of profitability is Robux, the in-game digital currency. Users pay US$19.99 for 1,700 Robux, or a monthly subscription service called Roblox Premium. Roblox makes it easy for users to buy Robux.
Not only that, Roblox taxes all transactions (when users sell stuff to each other) within games at 30%. To be honest, I didn’t like this tax at first, but the economics changed my mind. Let me explain why. Simply put, the tax removes Robux from the “game economy” and reduces the amount in circulation. So, users must keep buying to participate. To be sure, taxation is a fine line, however the 30% tax rate is not “fixed”. So there’s flexibility here and that’s a good thing.
Conclusion
Roblox is an all-in-one platform solution for gamers and developers (emphasis on newbie, but not always), that allows anyone to start with no upfront costs. This is THE STORY of Roblox. Roblox doesn’t have to worry about game development at all. That’s up to the community. All Roblox has to do is run top notch infrastructure, rake in the cash selling Robux, and tax transactions at 30%.
Roblox is unique to the gaming industry.
To be frank, Roblox is a real growth story. If management can continue to execute as they have done in the past, future earnings growth could be Netflix like.
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