Wednesday, March 10, 2021
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Roblox is creating a gaming empire, but needs to keep fickle gamers hooked
Roblox (RBLX), one of the most anticipated IPOs of 2021, hit the public market on Wednesday via direct listing. Landing amid a pandemic-driven explosion of growth in the $180 billion video game industry, Roblox’s initial shares began trading at $64.50 and closed the day at over $69.
Roblox is a unique beast. Unlike gaming giants Activision Blizzard (ATVI) or EA (EA), which spend millions to develop and publish games, Roblox relies on an army of users to create the titles that keep their fellow gamers playing for hours on end. And it’s been drawing plenty of interest.
According to its S1, Roblox had 31.1 million daily active users (DAUs) as of September 2020, up from 17.6 million DAUs in all of 2019 and 12 million DAUs in 2018. A whopping 7 million users are creators. And Roblox is only growing those ranks with its developer acceleration program and incubator programs, which could shape the future of gaming.
“The power of the business is that it is the on-ramp for a whole generation of creators,” Roger Lee, general partner with Battery Ventures, told Yahoo Finance. “They’ve developed a platform for [gamers] to create games, worlds, experiences that they potentially couldn't really create elsewhere.”
But Roblox faces a couple of major challenges: It will need to keep its users, the majority of whom are under 13, hooked for years to come by incentivizing creators to continue to develop for the platform, rather than leaving to build games on engines like Unity or Epic. It also needs to appeal to a new kind of user — an older one — if it wants to keep making money.
Roblox’s push to grab older users
To ensure it can hold on to users, Roblox is trying to crack a demographic it’s historically had trouble reaching: users who have graduated from middle school.
“The majority of our users are under the age of 13,” the company states in its S1 filing. “This demographic may be less brand loyal and more likely to follow trends, including viral trends, than other demographics...We also may not be able to penetrate other demographics in a meaningful manner to compensate for the loss of DAUs in this age group.”
Bloomberg Intelligence analyst Matthew Kanterman told Yahoo Finance Live on Wednesday that losing gamers who age out of Roblox could be a "big risk" for the company.
"Historically, they haven’t been successful in targeting the older demographic, and keeping gamers as they age out," Kanterman said. "Quite frankly, as gamers get older there are more options. As you become older and can play more mature games, you can play 'Grand Theft Auto' more hardcore racing and shooter games that aren’t necessarily good for younger gamers."
Older users don't just broaden Roblox's fan base — they also have deeper pockets than kids. At a certain point, a 12-year-old’s parents will stop giving her money to spend on gaming, whereas a 26-year-old with a job might be willing to spend more money to distract himself from the state of the world.
“This demographic has a higher propensity to spend on content, and our ability to increase penetration in, and user contribution from, this demographic will affect our ability to grow revenue,” the company stated in its S1.
Roblox isn’t your average game company
Roblox doesn’t offer a signature game of its own. There’s no Mario or Lara Croft here, but rather an endless open world of gaming possibilities.
Here’s how it works: You create an avatar that you then drop into games created by your fellow players. Those can involve racing titles, shooters, and even games that allow you to explore historical events and places like the sinking of the Titanic.
Users who build content for the platform make money off of sales of their creations to other players. Players buy in-game items, character outfits, etc., using Robux, a digital currency equal to $0.0035. Developers, meanwhile, collect a 70% cut of the Robux that players spend in their games.
Roblox says some 1,050 developers have earned at least $10,000 while another 250 have made $100,000 or more through September 2020.
One way to lure older gamers in is to provide even greater incentives to stay with Roblox, Lee explained. By doing so, Roblox can retain the best developers. These developers make better experiences for their players, rather than taking their talents to competing game development platforms or using engines like Unity or the Epic Game Engine.
And by going public, Roblox will be able to pile money into its developer tools, providing creators with the ability to build games that will appeal to gamers across age groups.
But the game's young demographic isn't necessarily all bad for Roblox, as it's grooming an entire generation of gamers.
“To think we have a whole generation of really young people growing up living and breathing this type of stuff, the things that are going to create in 20 years is going to be amazing,” Mat Piscatella, executive director of games at NPD Group, to Yahoo Finance.
Still, if the company is going to continue to expand, it will need to push out of its comfort zone. It’s already doing that to a degree with unique experiences like a series of concerts performed by Lil Nas X on the platform.
The creation of ever more worlds and experiences will not only ensure younger users remain passionate about the platform, but may also pique the curiosity of older gamers. It's still early days for the company, and it's sure to further expand its reach. And if it can manage to offer elements that appeal to an older audience as well as its established younger follows, it may just count me as a player in the future, too.
By Daniel Howley, tech editor. Follow him at @DanielHowley