Imagine a shopping mall filled just with arcades. Each arcade is an independent business but fully dependent on the mall for its operation. Even the tokens that go into the machines are provided by the mall operator, which takes a 75 percent cut of every transaction. That might sound like a lot, but in this case the mall provides pretty much everything the arcades need to operate. Now stick millions of children in the mall per day, and you've got some sense of what a brick-and-mortar version of Roblox, the wildly popular online gaming platform, might look like.
It's an imperfect metaphor, but it might just help you understand the novel approach to game development and player engagement that the company represents. Over the last 16 years, Roblox built itself up from a modestly populated 3D world where users, mostly kids, could play games, socialize, and create stuff into an industry giant with a nearly $30 billion market cap. Much of that growth took place during the pandemic. In July 2020, the company said that half of all kids and teenagers under the age of 16 in the U.S. played Roblox, and this was back when the daily user base was around 30 million, compared to roughly 52 million today.
In short, if you're a parent, your kids probably play Roblox. They may have even asked you to buy them some Roblox merchandise, like a set of collectible Roblox action figures or a Roblox backpack, t-shirt, or baseball cap. Perhaps they've spent entire family dinners talking about the latest Roblox intrigue, or making the case for why you should fork over your credit card to buy more "Robux" — the in-game currency that players need to access many aspects of the Roblox universe.
So while the platform is largely oriented towards kids, billions of dollars flow through it. To return to the mall metaphor, Roblox is very much a commercial space, and it's getting more commercialized all the time. Professional developers are increasingly using Roblox's software and distribution platform to create and market games. Meanwhile, players are aging with the platform, making it easier and arguably more ethical to sell them stuff. In line with this trend, Roblox recently launched immersive in-game advertisements for players over the age of 13.
Our vision really is for anything you see in real life to have an engaging translation in the metaverse.
For Roblox, this is all part of a grander vision to become more than a gaming company and dominate the emerging metaverse. "We don't think of ourselves as a gaming platform, although obviously a lot of our experiences are gaming," said Enrico D'Angelo, vice president of product, economy & ecosystems at Roblox. "I don't think our vision is to play a certain role in the gaming ecosystem. We're building the metaverse. We're building eco-experiences. Our vision really is for anything you see in real life to have an engaging translation in the metaverse."
This vision is reflected in a series of recent announcements, including richer 3D environments, increased voice chat capabilities, and new motion capture tools. In other words, gaming, social media, commerce, and virtual reality are a package deal for Roblox, and it's planning to leverage its popularity among young gamers to rocket ahead of competitors such as Meta, Decentraland, and The Sandbox.
"They're trying to be the Apple of the metaverse," said Jordan Phang, analyst for Naavik and a former game designer. "Do you question why am I locked into the Apple ecosystem and have to use an iMac and an iPhone and be on iCloud all the time? It just works. That's where they're going. They want it to just work, so that people don't question how all of this is being controlled by one company."
Studio Co-Create image courtesy of Roblox.
A New Way to Make Games
Whether Roblox should be considered a gaming company or not, its main product remains games — or "experiences" as the company calls them — which are created by a mix of professional and non-professional developers. Right now, there are more than 32 million user-generated experiences on Roblox, and more than 12 million active creators. Out of that total, 2.7 million actually earned Robux in June 2022.
The importance of user-generated content goes back to the earliest days of Roblox, when it was just a fledgling multiplayer online world with a small but devoted user base. "It was a product focused on simulation and community building, where people would come on and build experiences just as a hobby," said D'Angelo. "It was about reputation. Nobody was getting paid. Everybody was doing it for free."
This changed in 2013 with the introduction of monetization and developer payouts. Basically, creators started getting a cut of any Robux spent in their experiences.
The change coincided with a boom in free-to-play mobile games, which made their money from microtransactions rather than upfront fees, so customers were increasingly primed for this. The difference was that Roblox served as a kind of central bank. Every dollar spent first had to be converted into Robux.
Today, the model remains more or less the same. Developers get a 25 percent cut of each digital transaction, and Roblox gets the rest. That's significantly higher than other platforms that host original games, but Roblox also offers a very different service. "People will say 'Apple gives me 70. Epic gives me 88,'" said D'Angelo. "Yes, but it's apples and oranges, because they only give you distribution, whereas we give you essentially everything that you need to have a live game."
Marcus Holmström, CEO of The Gang, one of the earliest professional gaming studios to build on the platform, said that he understands why Roblox takes a higher cut because it essentially takes care of all the overhead involved in making a game. That includes the servers, development software, and payment infrastructure, not to mention a pre-existing audience of millions of daily users.
"If the percentage is fair or not, I think that's up to every developer to decide if it's enough for them to enter the platform," he said. "We are obviously there, so we have bought into it." He added that the studio's biggest game, Strongman Simulator, has gotten nearly 780 million visits since it was created in May of 2021.
Pros and Cons
Yet pumping out a hit game is still no walk in the park, and The Gang struggled at first to adjust to the platform's distinctive development model and audience. The studio's first Roblox game was a critical and financial failure, Holmström said, in part because it was designed as a more traditional open-world game. "It was not social, and there was also no direction or holding hands for the player. We treated the player as you would in a traditional game for older people."
Phang, of Naavik, said this is likely a fairly common problem for developers who are new to Roblox. "I think a team that's used to creating games and apps will need a bit of ramp-up time to get into Roblox. It feels like the kind of thing where a team will be seduced by the numbers and give it a try and quickly realize that 'Oh, it's actually a lot more expensive to create a game on Roblox than I thought.'"
A Naavik analysis found that it costs a professional gaming studio about $120,000 to launch a game on Roblox, and another $60,000 to promote it over its lifespan.
"That's not that cheap," said Phang. "The key part of the equation is that Roblox has got to be able to pay the developers more. A really successful Roblox game is making a fraction of what a successful free-to-play game would make."
One counterpoint to this argument is that studios are taking on significantly less risk up front on Roblox, allowing them to iterate more rapidly and worry less about how to monetize so they can pay off their debts. "The other issue that you have with more traditional platforms is that you usually have to spend a lot of money upfront and dig a pretty big hole with the hope that your game is strong enough for those users to stick so that you can get out of that hole and actually get to positive cash-flow," said Matt Curtis, vice president of developer relations at Roblox.
He acknowledged that this appeal may be lost on more established developers who already own proprietary technology and even their own servers, but that there's "nothing like it" for the vast majority of smaller developers. "It allows developers to find a success case without a lot of investment, without a lot of risk, and through reiteration define a product-market fit instead of having to build something in a vacuum for months at a time and hoping that it pays out."
One non-professional creator, who goes by SONICTHEHEDGEHOGXX, told Cheddar News that Roblox has been lucrative for them since joining in 2008. "I can't really get into direct details, but I have made a decent living developing games on Roblox," they said. "I definitely think they could increase [the creator percentage], but Roblox is always making improvements to monetization."
Chat image courtesy of Roblox.
Who's Making Money?
But as the platform grows and the marketplace for games becomes more saturated, reaching a sustainable number of players could become more of a challenge, especially given that studios can't just purchase exposure. "You can't buy your way to the top," Holmström said. "With a mobile game, you can put in tons of cash, and you will get traffic from that. Here, you can't be guaranteed to acquire people with money. You can, of course, buy some traffic, but only to a certain extent."
On the one hand, this more merit-based system could benefit smaller developers that create a great game but don't have the resources to market it. On the other hand, it might just make it harder for everyone to get noticed and make money — eventually undermining Roblox's value proposition to developers.
Even now, it's clear that a small number of developers make up the majority of revenue: Roblox creators earned $538.3 million in 2021, according to the company. This summer, there were 2.7 million creators. A Naavik analysis found that the top five games in terms of revenue accounted for more than a fifth of earnings. This aligns with CEO Dave Baszucki's comments last year that a top-earner was nearing $100 million.
The disparity is one reason Roblox introduced what are called engagement-based payouts. These are payments to developers based on the amount of time users spend in their experiences, and the money comes straight from Roblox's margins.
"We're literally providing money and revenue to developers based on engagement and engagement alone," said Curtis. "So you can be a developer who is just starting out and focus on what works rather than rushing to monetization."
D'Angelo noted that "discovery," or being found by users, could be a challenge going forward, which is why it's taken steps to tailor its algorithms.
"Our discovery algorithms are getting better all the time," said D'Angelo. "We're very sensitive to personalizing discovery to promote not just big experiences but the experiences that are right for you. We can't promise that every single experience will be huge, but our effort is to make sure that every single experience is in front of the right individuals, so they have a fair shot at growth."
This includes putting games in front of the right age group, he added.
Clothing creation image courtesy of Roblox.
Kids to Customers
Indeed, Roblox's business strategy hinges on a major demographic shift among its users, which it says is already underway. Users 13 years and older now make up over half of Roblox users, according to the company, and the fastest growing demographic in the second quarter of 2022 was users between 17 and 24 year old. That leaves close to 26 million pre-teens on the platform, however, and watchdog groups have criticized the company for not taking steps to protect them.
Truth in Advertising, a nonprofit advocacy group, wrote in a complaint to the Federal Trade Commission back in April that Roblox has "failed to establish any meaningful guardrails to ensure compliance with truth in advertising law," and that companies and influencers are "exploiting children’s inability to distinguish organic content from marketing, and manipulating them and other Roblox users with undisclosed promotions that are nearly identical to organic virtual items and experiences on the platform."
Roblox refutes these claims, and said it has taken steps to identify what is and is not advertising on the platform. "We will not serve ads to users under 13. If you're not 13, you're not going to see any of this," said D'Angelo. "That's a very clear message that we're trying to make this as uncontroversial as possible."
Beyond the ethics of advertising, Roblox's efforts to tailor its experience for different age groups could prove essential to its longer-term goal of building a metaverse experience that is appealing to all age groups.
The company is currently working on "Experience Guidelines" designed to help users (and parents of users) refine the types of content they interact with. "The age recommendations are grounded in child development research and informed by industry standards," said a press release from Roblox. "Parents will be able to use Parental Controls that restrict account access based on these age recommendations, ultimately deciding and managing what is appropriate for their children."
The push to tailor Roblox for different age groups comes as advertisers such as Nike and Gucci enter the space with branded experiences and spaces, and the company is banking on even more of these kinds of partnerships in the future.
"A lot of this stuff has been around for a while," said Christina Wootton, vice president of global brand partnerships for Roblox. "What has changed though is how brands and talent think about Roblox to engage with audiences in a really social way and use it as their next immersive 3D channel."
In response to concerns that greater commercialization could open up users to exploitation, D'Angelo stressed that in-game advertisements won't send users out of the platform. He also expressed Roblox's broader goal of keeping users within its growing ecosystem.
"Everything is going to happen inside of Roblox, so we're not going to send users outside of our platform, which means that the data will stay within Roblox," he said. "That has a dual purpose. One is data privacy. We want to make sure the data stays safe with us. We also don't want to disrupt the user experience."