Key information

Roblox (RBLX) is an online gaming and game-creation platform. Developers and creators can create and publish their own game content on Roblox Studio. Other users access and play these games through Roblox Client applications. RBLX’s platform is powered by its in-house system, Roblox Cloud, backed by its own data centres. Based on a report by GameRefinery, a mobile gaming research firm, Roblox’s market share in US is estimated to be 4.85%.

Business

RBLX’s platform relies on user interactions and user-generated content for organic growth. Its community consisted of about 7mn active developers and 31.1mn daily active users (DAUs) as of September 2020.

Revenue sources. Almost all of its revenue is generated from sales of its digital in-game currency, Robux. This currency allows players to purchase virtual items or enhance their in-game experiences. Purchases can be one-off or made via monthly subscriptions, known as Roblox Premium (Figure 3). RBLX shares 26% of its sales with developers and pays 24% app-store fees. The remaining 50% is its share of revenue.

Other revenue streams are advertising, licensing and royalty fees from intellectual property (IP) rights, which are currently minimal.

DAU demographics. The majority or 33% of RBLX’s DAUs are from the US and Canada. About 54% of its DAUs are under the age of 12. The majority, or 72%, are engaged through mobile.

Highlights

1. Expansion to China for growth. RBLX’s joint venture with Songhua, an affiliate of Tencent Holdings, has secured licences to launch RBLX’s gaming platform on both mobile and PCs in China. We believe RBLX’s expansion into China will mirror the success of Minecraft, a similar freemium gaming platform as RBLX. The Chinese version of Minecraft was launched in China in August 2017. It captured 100mn registered users in less than a year.

Based on previous statements by Steven Ma, Tencent’s Senior Vice-President, the joint venture is expected to attract 40-50mn users in China. This figure towers above RBLX’s current 31.1mn DAUs. Assuming an increase of 10mn DAUs in its first year in China, RBLX’s annual bookings – which are revenue plus the change in deferred revenue and other non-cash adjustments in a year– can potentially increase 34.9% YoY from 2020 levels. China is thus expected to provide a large boost to its sales.

2. Potential revenue diversification. RBLX generates almost all of its revenue from sales of its digital in-game currency, Robux. About 52% of its 9M20 revenue was attributable to Robux sales through Apple’s App Store and Google’s Play Store. RBLX pays 30% of its in-app Robux sales to Apple and Google. This reduces its gross margins, which is likely to remain the case as it continues to shift to mobile distribution channels (Figure 4).

RBLX, however, has other potential monetisation channels which may generate higher margins. Its 150mn monthly active users can facilitate its expansion to advertising partnerships to tap its niche young user base. RBLX should also be able to leverage developers’ creations and license out more popular content to brands like Toys‘R’Us or Lego at its discretion under its Terms of Use.

3. Content expansion beyond entertainment. The ease of use of Roblox Studio may help less IT-savvy developers develop content on RBLX’s platform for various purposes. RBLX’s collaboration in China will focus on providing its platform as a potential educational tool for science, technology, engineering and mathematics students. Its 3D spatial technology also allows for simple visualisation, which can be applied to business (Figure 5).
4. Network effects and monetisation potential. Since 4Q19, growth in total hours engaged and bookings has outpaced growth in DAUs. This suggests higher engagement and spending per user. We believe RBLX is reaping the benefits of network effects, a situation where user-generated content attracts users to the platform which in turn provides incentives for more developers to create more content. The variety of content leads to more time spent on the platform and increases monetisation.