How Roblox Grows: From Virtual Playground to Global Empire

Lessons on steadfast vision, platform building, vertically-integrated ecosystems, community as the product, and a peak into what a virtual country looks like

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Jun 29, 2023

👋 Welcome to How They Grow, my newsletter’s main series. Bringing you in-depth analyses on the growth of popular companies, including their early strategies, current tactics, and actionable business-building lessons we can learn from them.

Hi, friends 👋

Today, we’re going to be digging into an incredible company I’ve had my eyes on ever since I wrote my first deep dive on the gaming industry. This creative platform has just been sitting on my roadmap, but when Rex Woodbury (Digital Native) and I chatted about a collaboration a few weeks ago, I instantly felt this would be the perfect opportunity for us to take a look at Roblox RBLX 0.00%↑.

If you don’t know Roblox, let’s start there.

The easiest way to think about it is like this: YouTube for online games. An ecosystem for game-making and hosting, vs a game itself.

But, to more accurately understand where they fit in the market, Roblox is really more YouTube meets LEGO meets Facebook meets Epic Games.

Quite the concoction of products there, we know. We’ll get more into why, but for now, just know that together this positions Roblox as one of the most important companies in the race for building and owning the biggest virtual economy. Also, this amalgamation has helped Roblox find an alternative and unique way to win in gaming, bringing them growth and engagement rates like a content marketplace (YouTube) or social network (Facebook) with the monetization of a game publisher (Epic Games, Blizzard).

Founded in 2004, the idea was simple but ambitious: create an online space where people from anywhere in the world could do anything—construct buildings, run businesses, battle enemies, play sports, attend concerts—together.

Today, with a market cap of $23.94B (as of 06/27/2023), the substance of this thriving virtual economy is powered entirely by community and user-generated content. Roblox is now a place where community, culture, creativity, education, and commerce meet.

We considered another Venn diagram, but you get the picture.

Now, if you don’t know

Rex Woodbury

, let’s fix that.

Rex is the phenomenal writer behind one of my favorite newsletters,

Digital Native

. Each week, Rex examines how people and technology intersect, specifically, covering the ways that we use tech to communicate, collaborate, and create. His write-ups are just fascinating and I walk away learning something every time. His newsletter is free, and if you’re not a reader, I highly recommend joining 45K+ others by just hitting subscribe below. 👇

Since Roblox cuts very much across Rex’s focus area, he was the perfect partner to tackle Roblox with. And, with that little bit of context, join us as we dive deep into this gaming and entertainment behemoth.

Here’s what you can expect in our analysis:

The Gaming Market: A Quick Primer
The First Blocks: The Beginning of The Roblox Story
How Roblox Grows: Building The Future of Human Co-Experience
- Platform as a Product: The Foundation For The Virtual Economy
- The Vertically Integrated Ecosystem: The Railroads Moving Value Through The Virtual Economy
- Community as a Product: The Citizens, Builders, and Culture of The Virtual Economy
A Future Beyond Games

Let’s get to it.

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The Gaming Market: A Quick Primer

Most people don’t appreciate just how big gaming is.

Gaming is bigger than the box office, streaming video, and recorded music industries combined—and growing much faster. Gaming has become the largest category of media, with over 3 billion gamers globally. This chart is a little dated now (gaming is now a ~$200B market), but it gets the point across: gaming is huge.

And, it’s only getting a lot bigger. By 2028, gaming should be a $435B business.

That being said, compared to film and music, gaming is relatively new. Nintendo was—surprisingly—founded the same year that Vincent Van Gogh painted Starry Night. Nintendo started out in 1889 making playing cards, and it was almost a century before the company launched into video games.

Nintendo’s move into gaming was mostly a reaction to the success of companies like Atari, a pioneer of arcade games, and breakthrough titles like Pong. (Atari was also one of the first venture-backed companies in Silicon Valley.) Starting around 1980, Nintendo began rolling out iconic IPs: Mario, Donkey Kong, Zelda, and Pokémon. By 1990, a national survey had found that Mario was even more recognizable among American kids than Mickey Mouse (!).

In the 80s and 90s, gaming really took off. And it now sucks up an enormous amount of time: 76% of Americans play video games regularly, with the average gamer playing 16.5 hours per week. Gaming still gets a lot of eye-rolls. For many people, gaming conjures the image of a teenage boy isolated in his mom’s basement. The reality is that the average age of a U.S. gamer is 35, with only 29% of gamers under 18; that close to half (45%) of gamers are women; and that gaming is deeply social.

As games get more immersive, the lines blur between social and gaming. This isn’t new: as long as sandbox games have been around (games that give players lots of creative freedom), gaming has trended toward socialization, sometimes even losing gameplay altogether. Is it still gaming if you’re hanging out and trading fish in Animal Crossing? Is it gaming if you’re attending an Ariana Grande concert in Fortnite?

Gaming is now about immersive socialization. Take Fortnite’s events in recent years: 28M people “attended” Travis Scott’s concert, 11M people attended Marshmello’s, and 3M people watched the Star Wars event with JJ Abrams in 2021. In Fortnite, players can be their favorite pop culture characters. Players can attend the Star Wars event as Han Solo. IP owners are more than happy to make this possible: Disney introduced Marvel “skins” and the NFL provided NFL jerseys—both for free. Offering your IP in Fortnite creates powerful brand affinity.

Part of what enables these cultural experiences is that this generation’s “games” resemble virtual worlds more than they resemble Tetris or Mario Kart. Today’s most compelling gaming companies are platforms. Companies like Roblox don’t create any games—players create their own games and earn a share of revenue. This significantly de-risks an investment: there are over 40 million games on Roblox, with the top 10 games representing only ~30-40% of revenue.

Virtual worlds are underpinned by robust digital economies. Roblox developers earned over $600M in 2022, a payout that’s grown at a 77% compound annual growth rate since 2019. Epic Games, the maker of Fortnite, grossed nearly $50M just from sales of NFL skins.

Gaming has gone from a niche hobby to a massive global industry across all demographics and well-beyond outdated, narrow, stereotypes of “gamers”.

And back in 2019, Andreessen Horowitz (pioneer VCs in the gaming sector) called 6 trends that they saw driving the rapid change in the gaming industry. As Jonathan Lai and Andrew Chen wrote:

The way we develop, discover, and play games is rapidly evolving. The next generation of games will differ from their predecessors in six key ways:

In other words, Andreessen believes the world of video gaming is going through a seismic shift, where:

Games are the new mall (and the new sports bar, and concert area)
Games are no longer one-off “hits,” but living franchises
Platform convergence will create massive hits
Game discovery will be organic and social
The next Marvel universe will be born from games
Consumers are co-creators

And with all those 6 trends in mind, that is the perfect segue into Roblox. Let’s start at the beginning, long before any of those trends were in sight.

The First Blocks: The Beginning of The Roblox Story

Not that we were around to witness any of it, but a few very important things happened back in 1989.

The Berlin Wall was bought down, Michael Keaton bought Batman to the big screen in the golden age of superhero films, and David Baszucki and his brother, Greg, founded Knowledge Revolution, an early-computer-era startup out of California.

Simply, Knowledge Revolution was an educational physics and mechanical simulation software. It looked something like Microsoft Paint, but with somewhat more powerful paintbrushes and evolved artworks.

While there, the brothers teamed up with technologist Erik Cassel, who had written a general-purpose physics simulator called Interactive Physics. This was quickly folded into Knowledge Revolution, and the trio’s goal became to help physics students in schools simulate motion, mass, friction, elasticity, and other nerdy physics things.

But, while designed as an educational tool, kids started using it in unexpected ways. Namely, as a way to build games and experiences that they could play and show off to their friends. As David recalls:

The fun seemed to be in building your own experiment. When people were playing it and we went into schools and labs, they were all making car crashes and buildings fall down, making really funny stuff.

As you might be noticing here, this was the seed for Roblox. 🌱

And that seed lay buried for almost 15 years. During the time (to squish the history for you), they sold Knowledge Revolution for $20M in 1998, and the three gents went their separate ways, with David investing in the grandfather of social networks—Friendster.

This is a seemingly irrelevant point to this story, except, not quite. David’s experience and proximity to this social platform seeded another idea: the online social graph.

David and Erik had never let go of, as David says, “the notion of enabling meaningful co-creation”. So, together with this then-novel concept of social connections, David brushed the dust off his earlier idea of an interactive, fun, and educational creation tool. Glued together, they had the premise for Roblox: a sandbox for kids to build, share, and socialize around play in a safe virtual space.

Our physics simulator was on the cusp of something interesting, but we wondered what it might be like to add avatars, a social element, and a hyperreal 3D world and run in the cloud. We were also inspired by the work of futurists and science fiction writers such as Arthur C. Clarke and Neal Stephenson. What would the next phase of human interaction be? Could we help create it?
— David

Hooked by that question, in 2004, the gang got back together (well, David and Erik), and they started building Roblox.

But, circa the Web2 gold rush of the early 2000s, other entrepreneurs were also gravitating towards similar opportunities. As Mario Gabriele wrote:

Roblox was founded during a fertile period for large virtual worlds and gaming platforms: broadband adoption, hardware improvements, the growth of multiplayer gaming, and the recovering Silicon Valley ecosystem all played into producing immersive environments for socialization like Second Life (founded in 2003), IMVU (2004) and Metaplace (2006). In its pursuit of a younger audience, Roblox also shared DNA with children’s platforms like Habbo Hotel (2000) and Club Penguin (2005). It even bore some resemblance to casual game platforms like King.com (2003) and Kongregate (2006).

After almost 2 years of building, their beta platform launched in September 2006. At that point, it was no doubt very hard to see who the winners in the space would be. But, their vision was bold, and they were confident that they were the right people to execute. Reminiscing on the early days, here’s how David remembers laying their first ~~blocks~~ blox.

When Erik Cassel and I launched Roblox, our users were friends, family members, and about 100 tech enthusiasts we’d recruited via Google ads. We offered one experience. “Peak times’’ meant maybe 30 or 40 people playing at once. Erik and I were the moderators, keeping our community safe and civil.
We also chatted constantly with those early users about what they wanted to see on the platform. Our vision from the start was to build an entirely new category of human co-experience—nothing less than the realization of the next phase of human interaction. We imagined an online space where people from anywhere in the world could share experiences with friends, just as they would in person.
Our core idea to get there was a platform supported by a community of creators who built everything on it. Together they—not us—could design clothes, construct buildings, make discoveries, run businesses, spend time with family, play sports, and attend concerts. Erik and I had already seen the power of user-generated content on Interactive Physics, a platform we’d launched and run with others to support physics learning through 2D modeling. Even in that primitive form, users engaged more deeply when they were the ones doing the building.
We started coding. Soon we had a prototype, which we called DynaBlocks. A year and a half later we released the beta version and in 2006 had our official launch.
Our first multiplayer experience was a wonder. About 20 users on the platform congregated in an experience called Crossroads. They suddenly realized they could build on top of their avatars and started carrying one another around on elaborate contraptions on their shoulders. It was inspiring—and fun.
At first we just wanted to prove that this kind of platform could work. But once we released Roblox Studio, our free creation engine, the UGC floodgates opened. Roblox Studio allows users to build basic things, such as drag-and-drop obstacle courses and models, and to create complex behavior and experiences using our scripting language Luau.
We had a lot of work to do, however. Our 3D engine, animation system, and content curation all needed overhauling and improving. We envisioned how we could improve our financials without outside investments. One idea was a virtual economy based on our virtual currency, Robux, which we started building in 2007. Players would be rewarded for participation and could earn various benefits through Builders Club (now Roblox Premium), a membership program for users interested in rewards for creating virtual items and experiences on the platform.

You might be getting a whiff of a metaverse here. And you’d be right.

While Roblox doesn’t refer to it much (just 16 times in their S-1), that is largely their overarching vision. Except, not necessarily in the way you may be thinking about it.

Ever since sci-fi writer Neal Stephenson first coined the concept of a global, virtual, and persistent space shared by many, we’ve been talking about the metaverse. And while pundits have been distracted by the readiness debates and questions over VR and AR, the foundations of such a place have been quietly getting built in the background…in Roblox.

With David and Erik’s focus on safety, persistent identity across games and worlds, and the ability to easily move between experiences—of which there are 40M+ on the platform— Roblox is well on its way to making the metaverse a reality.

And they didn’t even need to change the name.

The game of attention

With this long-term prospectus and positioning as a game and entertainment platform, Roblox’s fundamental competition is anything that vies for their (younger leaning) customers’ free time.

This means they’re fighting for two things.

Attention: Because Roblox is a place to hang out with friends, as well as have fun, they compete with video content platforms (YouTube, Netflix, Twitch, etc), social platforms (TikTok, Snap, etc), and direct game producers (Epic with Fortnite, Blizzard with Diablo, etc) who are in the business of making AAA (very high quality) games.
Game Developers: We’ll be getting more into this, but the variety of content available on Roblox comes from indie developers. And for every game made, developers need to make a choice about (1) what engine to build it on, and (2) which platforms to publish them on. This puts Roblox in direct competition with Unity and Epic Games (game engine providers and distributors) as they all fight for the same pool of developers. This means (arguably the biggest) pillar of Roblox’s strategy needs to be keeping developers happy and invested in their game engine and creator ecosystem. That’s how their UGC flywheel keeps moving.

Earlier this year, Jaryd did a deep dive into Epic Games ($32B valuation). If you read it, you might agree that Epic is clearly Roblox’s biggest competition in both the short-term and the long-term play of building a metaverse. If you haven’t read it (besides bookmarking it for later), here’s a brief TL;DR by Mario from The Generalist explaining why Epic is a threat:

Epic may steal attention through Fortnite but siphons engineering talent away thanks to its Unreal Engine. Like Unity, the company's product is robust and better-suited to higher-fidelity, higher-complexity games. Intriguingly, Fortnite also has a "Creative Mode," which, as the name suggests, allows developers to create their own content. Over time, we might expect Epic to expand this product, increasing its appeal for amateur developers.

But, in this overarching game for attention and developers, Roblox’s model, structurally, has several advantages:

Efficient content spending: Roblox only pays developers when their games are successful.
They avoid the hit-driven model: Millions of active developers reduce risk to create a hit. Game variety is key for players, who play on average 15 unique titles/month, out of the millions of games available on Roblox.
Global opportunity: Local developers can customize content to local regions and trends, and their platform (more on this soon) also handles game translation at scale.
Virality and engagement through social: It’s rare for a game to grow organically with almost no CAC. But Roblox’s community and social nature give them a significant advantage for scale and margins. Plus, by having a social network layered across their virtual worlds with identity/avatar and chat abilities, players are more active and engaged than with traditional mobile or AAA games.
Content Network: As more players are more engaged through social features and game variety, more developers build for the platform, which in turn creates more game variety, more users, and better developer monetization. This fuels that powerful UGC growth loop, bringing Roblox a powerful moat.
The IKEA Effect: More on this soon

Now, the next question: is their model working? 🤔

Blox on blox on blox: Explosive growth after a slow burn

Like James Cameron’s Avatar, Roblox is a blockbuster company that was 20 years in the making.

For most of their history, they were small. Both as a platform, and tech company.

As Chris Fralic (the lead investor, and partner, from First Round) says, Roblox was a slow bake.

With Roblox, I watched the company grow, but remain well under the radar. While the company wasn’t a household name yet, Dave was always steadfast in his vision to create a new category of the “human co-experience” and the “metaverse” — even when others didn’t fully see it.
For both founders and investors alike, this is a reminder of the role that patience plays in company building— many breakout startups aren’t built overnight or immediately off to the races. Some, like Roblox, are more of a “slow bake.”
The lesson here is that it takes a long time to build a transcendent company, and you’ll often be misunderstood or undervalued for most of that time. The bulk of Roblox’s journey was steady, heads-down community building and product refinement. As a 2019 TechCrunch article highlighted, “Roblox experienced 10x growth in about 3 years, from 9 million users in February 2016 to 90 million in April 2019” — just one leg of their 17-year company-building journey.
My partner Josh Kopelman made this slide a while back, which captures this dynamic well:

That’s a pretty incredible leap in their valuation, and we love Chris’ takeaway there: it takes a long time to build a transcendent company, and you’ll often be misunderstood or undervalued for most of that time.

Avoiding distractions, and sticking to their vision: A lesson on how patience can create amazing growth cycles

The first 12ish years of Roblox were focused on a great deal of work, and very little paid acquisition.

Just to illustrate how slow of a burn it really was, just take a look at this graph from The Economist. Almost 10 years of slow, gradually linear, growth. Then, boom.

In their early years, Roblox did buy some users. But, that was just to seed a user base while they worked towards their grand vision of a virtual economy: building a game engine, platform, social features, a creator community, and their own game titles. Once they had an initial community, they stopped paid acquisition.

But, looking at such flat growth for so long, you’d imagine David and Erik would have considered alternatives and been wavering in their strategy.

Nope. And this brings us an excellent lesson in patience and taking the long view, despite attractive short-term pressures.

As mentioned earlier, when Roblox was getting started there were a lot of other budding companies in the space. In many cases, they were finding a lot more success than Roblox was. In a competitive environment, that means there were constant distractions.

Among many examples, let’s just take the 2009 release of Minecraft. With a similar LEGO-style world to Roblox’s, but created by a single developer, it was very much the game to Roblox’s platform. It reached 10M paying users by 2013, shadowing Roblox’s user base. As Adam Miller (VP of Engineering and Tech), remembers it: “Minecraft was one of the biggest events. When Minecraft arrived, with a very similar audience, it just blew through Roblox. It took some fortitude to not just copy Minecraft and say that’s more of a game, we should be more of a game”.

Outside of the phenomena of Minecraft, there was plenty of other activity taking place in gaming that constantly posed a philosophical threat to David’s vision. When a gaming product hit it big, that winning strategy of course became a temptation. “There are friends, acquaintances, competitors chattering in your ear and saying, maybe you can just do that”, says Matt Dusek, an original Roblox hire.

But, the ability to ignore these distractions is a facet of Roblox’s success that should not be underestimated. As David Sze—Partner at Greylock and Roblox investor—said about David Baszucki:

Next to Mark Zuckerberg I haven’t seen someone as mission-focused and vision and long term focused. He got tons of pressure that it wasn’t working and he needed to change things… [but] he really understood the pieces that needed to come into place and never wavered from that, whereas other people had pieces of the vision and didn’t stick with it for the long term.

**David Baszucki**: *Source: Winni Wintermeyer, via Harvard Business Review*

Today, as we know, that heads-down building and ability to ignore shiny temptations has paid off big time.

For the twelve months ending March 31, 2023, Roblox’s revenue was $2.3B, a 13.24% increase year-over-year. But, besides impressive revenue, the juicy data is more around, “How they are doing in the attention and developer game?”.

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Keep reading...

Lots of eyeballs. Regularly. And for a long time.

Roblox’s main demographic is the youth. And just to understand the scale of their reach, over half of all US kids use Roblox, with two-thirds of all kids between 9 and 12 actively on the platform.

What’s more, it’s not just the reach that’s impressive. Their usage is also highly frequent (66M daily active users in the US, compared to TikTok’s 50M). Plus, when people are on Roblox, they are on for a long time (2.6 hours a day). 👇

That level of engagement is wild, as well as indicative of how effectively Roblox has captured its market. In Scott Galloway’s iconic words: “Money follows attention, and one firm has more of our children’s attention than any firm on earth.”

Okay. Let’s see how they’re doing it. 🤔

Enjoying this deep dive so far? Feel free to share it :)

How Roblox Grows: Building The Future of Human Co-experience

In Roblox’s view, “co-experience” means immersive environments where users play, explore, talk, hang out, and create an identity that’s as thoroughly fleshed out as their offline, real life.

But who are we to explain this vision on their behalf? David…

Where are we going with all this? With enough computer power and bandwidth, parts of Roblox’s human co-experience platform will look and feel more realistic than ever before and therefore more immersive and even more useful to even more people. Creators who want photorealism will get that, while those who still want a cartoon world will have that option. You’ll be able to attend a concert with 50,000 people and see and hear almost exactly what you would at a live venue. Avatars will become more sophisticated, letting people be whomever they want to be online.
For an eight-year-old, Roblox will be an engaging alternative to a local playground on a rainy day. A middle or high school student can tour ancient Rome, join a mission to Mars, or learn a foreign language with students halfway around the world. Aspiring young designers were recently able to attend the exclusive Fashion Awards 2021 at London’s iconic Royal Albert Hall virtually on Roblox. A mom of two teenage daughters, housebound during the Covid crisis, used our platform to spend time “snowboarding” with them. Businesses may choose to have fully virtual workplaces, with avatars engaging in the same water-cooler conversations and brainstorming sessions they’d have at the office, but from anywhere.

With Roblox’s slow-bake period clearly over, they are moving at full pace to make that vision a reality. And to unpack how Roblox has created such impressive growth, engagement, and just sheer scale in the last few years—and is positioned to keep it going—we’ll analyze them as follows:

Platform as a Product: The Foundation For The Virtual Economy
The Vertically Integrated Ecosystem: The Railroads Moving Value Through The Virtual Economy
Community as a Product: The Citizens, Builders, and Culture of The Virtual Economy

Get comfortable. 🫖

Platform as a Product: The Foundation For The Virtual Economy

Let’s start with some basic terminology, as it’s quite easy for meanings to get jumbled up when talking about products and platforms.

A product solves one true problem, there’s generally one core reason why people use it, and there’s (usually) a single revenue stream. A platform, on the other hand, is the interconnection of multiple products working together to solve multiple problems, generally connecting different groups of people with multiple revenue streams.

To give a layman's example:

Product: You pay a subscription to Apple Music because it allows you to listen to music.
Platform: You can use Shopify to create a store through their Store Creation Experience, manage inventory with Inventory Management, and purchase from other shops through their Shopping Experience.

Source: Blaise Hale, Product vs. Platform: Know the Difference

Platforms are very powerful. Just looking at some of the most valuable public companies (i.e. Apple, Microsoft, Google, Amazon, and Meta), we can see they are platform plays. Although some of them started with platforms, many started with products. For instance, Amazon launched as a book retailer in 1994 and six years later introduced Amazon Marketplace; Google began with a search engine in the mid-1990s and then introduced search advertising in 2000; and Apple created the iPod in 2001 but didn’t move toward a platform until it developed the iTunes Store in 2003 and the App Store in 2008.

The shift to platform is where those companies started to generate, and capture, serious value.

And for many startups, that product then platform strategy is the most viable and safest go-to-market move. Solving one core problem first, focused on one business model, targeted at a one-sided user base, is a simpler wedge to build up a critical audience.

Read differently: a great platform usually starts with a great product.

However, Roblox’s approach was completely driven by the strategic vision of the platform being everything in order to power co-experience. As David noted:

We learned something really important when we started off with that Interactive Physics software. What we learned is that the creations of users in a community is infinitely more compelling and engaging than anything we could ever create, and that's kinda stuck with us.
So, Roblox is all about platform principles. We don't make the content, our users create the content. We don't drive the monetization, our creators drive the monetization and and we don't even really buy traffic that much. Our creators create viral experiences that attract other people to the platform. When we set out to build Roblox, we [bought in] these core [platform] principles that we had from our learnings with Interactive Physics.

Remember, 2004 was long before the likes of Vine, TikTok, and the idea of user-generated content. So, this insight that in order to build a virtual economy, the people needed to do the building, was novel and contrarian.

This meant, from the get-go, Roblox was being built for a community of developers of all ages, from across the globe, to create on the Roblox platform. And they needed to be able to do that without the up-front costs, risks, and failures of the traditional top-down game publisher model. So, at Roblox, they need to provide everything—AKA the resources, tools, and support— a young/indie game maker needs to build, distribute, host, and moderate a game or experience.

The easier it is for a creator to just come to Roblox with an idea and do everything within the platform from there, the larger the share virtual economy will be.

This platform-native play leads to a lovely combination of social virality and network effects:

Social networks where users bring their friends in to play with them, who in turn attract their other friends to come to play, and so on.
“Creator/player” network effects where more players attract more creators to build great games, who in turn attract more players — creating a virtuous cycle that increases how valuable the entire network is for everybody.

What’s more, by being a pure platform, Roblox gets to enjoy another powerful force.👇

The IKEA effect: We love it more if we made it

In 2011, a study was run where the results were so surprising that a new cognitive effect was coined.

Simply, the IKEA effect is a cognitive bias that suggests that people place a higher value on things they helped to build or create — even if they are technically “worse”.

There’s not too much more that needs to be said here, as the connection between (1) Roblox being a community-generated product, and (2) the idea of labor leading to love, is pretty clear.

It brings them strong word-of-mouth growth, brand affinity, higher user tolerance for issues, deeper levels of usage and engagement, as well as a lower risk of platform churn.

We believe this force is a strong undercurrent to Roblox’s success and continued growth.

And on that note, there are two other platform-based factors that have been essential to their growth.

Robux: the virtual currency for the virtual economy

Roblox’s main source of revenue comes from people buying and spending Robux. Essentially, cash is used to top up a user's wallet, and then—brilliantly—individual game makers have the power to (1) creatively come up with ways that players can spend within their experiences and (2) market those offerings in their worlds.

This means Roblox isn’t just a place for people to learn to code and make games, but also gives kids, teens, and young adults the resources and infrastructure to become entrepreneurs.

And we’re not talking ice cream money here, folks. Last year, $624M was paid out to developers.

That’s coming from the fact that players are dropping bombs on Roblox every day. Just as a comparison, Roblox brings in almost 10X more cash per day via Robux than Call of Duty Mobile does with ~150M more monthly users (who are older, and thus have more money to spend).

Robux is genius because it abstracts away the reality of dollars, and keeps users immersed in the virtual world of Roblox. I.e, there’s less friction in the decision to “swipe” a fake and gamified currency than it is to see dollar amounts.

Whether that’s a good or bad thing is not for us to call, but Roblox definitely isn’t alone in this strategy of using some sort of branded game bucks to drive spending.

Either way, Roblox’s job as a platform isn’t to figure out what to charge for things and dictate pricing, it’s just to provide the infrastructure to support transactions within the micro-economy.

And that single currency they empower the community with services three types of transactions:

Transactions between users and developers.
- Cosmetic upgrades to avatars. Each user has an avatar that follows them around the metaverse, and like the real world, these identities can be made cooler with clothes, accessories, fantastical “skins”, etc. Players can buy these upgrades at the universal level, which to use Zuck’s favorite word, means interoperability.
- In-game content. Most free Roblox games allow players to alter the in-game experience through passes that offer time-limited or persistent perks through one-off purchases of virtual goods.
- Games access. Most games follow the classic free-to-play Candy Crush model, with revenue coming from in-game transactions. But, creators can choose to gate their games with a paywall.
Transactions between developers.
- Developers can sell each other virtual worlds, characters, or anything else they’ve made through the Roblox Creator Marketplace. This helps other devs enter the ecosystem to speed up the time to get a game to market.
Advertising of developers within the Roblox platform.
- Roblox also operates a native advertising network within its game discovery platform. This allows developers to use their earned(or purchased) Robux to market their games on Roblox’s app store.

As you can see, this is a lovely little micro economy where developers are spending Robux to advertise on Roblox, and more people then go and spend Robux in those games, driving theoretically larger ad budgets.

Roblox is hands-off besides supporting the platform layer of payments. For instance, by hosting an exchange and setting a “DevEx” rate to convert Robux to USD, and creating a subscription product to buy Robux at the going rate.

Then, Roblox’s platform also plays a key role in making their virtual economy global.

Laying the infrastructure for international expansion

Roblox needs to make it simple for creators to build games with a global appeal. Their job as the platform is to allow the creatives to make the experience and monetize it as they see fit, and then for Roblox to do the backend work to internationalize it.

This is not only valuable for the creator, but essential for Roblox’s growth.

Of course, the biggest issue Roblox faces with international expansion is translation. Given the social nature of games, it’s essential players can understand each other over text-based communication, as well as successfully engage with the game environments.

To address this global opportunity, Roblox has a solution to ease cross-cultural communication: a set of machine learning algorithms to translate across languages in near real-time. The difficulty in this solution lies in scale. With millions of games and even more players, doing this means some serious infrastructure. Moderation (something especially important when your platform is largely kids) across languages is also a challenge. But, as Roblox’s ML-based translations improve, so will their global growth.

…

Okay, continuing with this thread of Roblox being a platform, let’s look more specifically at how Roblox plays a role in moving value through it.

The Vertically Integrated Ecosystem: The Railroads Moving Value Through The Virtual Economy

Within this virtual economy that Roblox is powering, players and creators join because there is value. And where there is value accruing within a platform, there is a value chain.

In Roblox’s case, that chain be broken down into four big phases:

The means to create value (i.e Build)
The means to distribute value (i.e Share/Discover)
The means to receive value (i.e Play)
The means to capture value (i.e Get rewarded for value created)

A huge advantage Roblox has baked into its platform is that all those stages have been consolidated and live inside its ecosystem. And ultimately, the more value a company keeps in its ecosystem, the more valuable the business will be because of advantages like eliminated transaction costs, stronger value proposition, tighter technological integrations, better communication and collaboration, stickiness, and reduced risk.

To go back to the earlier example of Apple. Apple controls all stages of its massive value chain:

They have the device layer (iPhone, Mac, Vision)
They have the operating system layer (macOS, iOS)
They have the browser layer (Safari)
They have the distribution layer (App Store), which is also a massive value capture layer (App Store fees)
They have the end-user value (All the default Apple apps—like Music, Maps, Notes—that live on the most valuable real estate in the world: the default iPhone home screen)

Apple is truly the #1 masterclass on vertical integration, with only Google competing at a similar caliber.

The point here is that as a platform-play, you want to prevent any value from leaking outside of your ecosystem. That is how you become incredibly defensible, as you have a myriad of connected products working together and creating compounded platform value.

Let’s look a bit closer at each of these connected value stages. 🔬

The means to create value (i.e Build)

At the heart of it all, sits Roblox’s technological model. This can be broken up into a few parts:

Roblox Studio: This is their proprietary core game engine that enables creators/developers to build new experiences, characters, and digital assets.
Cloud infrastructure: A suite of cloud microservices that developers can use alongside building experiences in Studio, like translations.
The Creator Hub: This is all the supporting resources creators need, like open-source documentation, actionable recommendations to grow their experience, community support, as well as access to Roblox’s Game Fund, where they invest min. $500K in aspirational projects to continue seeding the creator flywheel.
The Talent Hub: This is like the Roblox community job board. Creators can post gigs looking for other game makers to either join their team or just help with an aspect of their game.

This is what the Studio looks like.

Together, all those pieces give creators an arsenal of powerful tools they need to build the Roblox world and publish experiences to iOS, Android, Mac, PC, and Xbox in seconds

After looking at Roblox’s public roadmap, it’s clear that this “Build” component of their strategy is the most important focus area. Besides improving the creator experience, the better their engine is, the richer the worlds and experiences will be, which is how the platform will evolve and deliver games that attract an older demographic.

And this strategy of building a better engine in order to attract more experienced developers, leading to better quality games (i.e. more realistic graphics), thus hooking in older kids/young adults, is working. As of just a few months ago, it’s clear Roblox has made decent strides in balancing out the age distribution of their user base. While still skewed young, they now have ~38% of their daily users being over 17. And similar to how going internationally unlocks more users, moving up the age-range chain is a big growth opportunity for Roblox.

Of course, what would a “Build” strategy be without the inclusion of generative AI—a seismic trend within gaming? Gen AI presents one of the largest opportunities for the gaming ecosystem with its ability to streamline the idea propagation value chain. Meaning, from the moment a creator images a concept for something, it’s much quicker to turn that thought into something tangible.

Practically, that means “the means to create” becomes a whole lot quicker and easier. Developers will be able to just type things out in plain text, and get generated assets for them to then easily iterate on.

What’s also worth calling out here, is that on the cost side, everything at this stage of the value chain is completely free. Roblox handles infrastructure hosting, storage, customer support, localization, payment processing, moderation, and platform costs.

Why?

Zero friction for developers. Roblox truly wants anyone with an idea to be able to come and contribute to their growing virtual economy.

And then, once developers have created games/experiences, the next piece of the chain is getting that in front of the right people. 👇

The means to distribute value (i.e Share/Discover)

Like startups in general, it’s not making the product that’s the biggest challenge, it’s distribution.

Luckily, Roblox solves the problem of helping the right people find the right games by creating and owning the means of distribution inside their ecosystem. This prevents any value from leaking outside Roblox, and it’s a huge value proposition for game makers knowing that through the Roblox platform that drives discovery and rapid viral growth, they have the reach to hundreds of millions of global eyeballs.

By just hitting publish, their games are deployed to Roblox’s audience who can join that experience in seconds with no additional downloads required (i.e. zero friction), making the potential for rapid growth very high. Couple this with the rich social graph connecting users, and their ability to see what their friends are doing and join them in session with a single tap, and you have a highly dynamic ecosystem for creators to launch new experiences.

And to be more specific about how Roblox drives this discovery, they are doing three things in what’s called the Roblox Client (i.e the interface the user experiences):

The discovery homepage: Like the YouTube homepage filled with recommendations, “Discover” on Roblox connects people with experiences that they will love and find most relevant to their interest graph. Algorithmically generated suggestions have social and contextual descriptors (like which friends are playing) to personalize the recommendations more and highlight the “Why should I care about this game?” better.
Powerful search and discovery: Outside of suggestions, Roblox gives gamers the tools they need to proactively search within their areas of interest, like filters. By improving these discovery vectors, Roblox helps deliver more relevant traffic to creators’ experiences more quickly.
Matchmaking: For the non-gaming folks reading, matchmaking is how online multiplayer games work. Thousands of people click to join a game, and the game needs to allocate people into appropriate groups to play each other on what’s called a game server. And this matchmaking is at the heart of Roblox's vision for connecting people. A strategic focus of theirs is to abstract away the complexity of game server management and use signals like friends, latency, language, experience, age, and server occupancy to direct users to game servers most likely to maximize engagement.

Those three things are how Roblox distributes value from developers to gamers, but importantly, Roblox also has the means to distribute value from developers to other developers.

As mentioned earlier, Robux can be used in micro-transactions between developers, as they sell licenses to the assets they’ve made through the Creator Marketplace.

The Roblox Creator Marketplace, where devs can buy/sell assets they’ve built to others

It will be interesting to see the impact of generative AI on this part of the business, as technically, a developer could shop around for inspiration here and then ask AI to make it for free. But, at least up until this point, this has been an important facet of how Roblox has helped support community-driven building.

…

There’s no need to talk about the value being received by gamers because, simply, that’s just users interacting with the experiences they find with friends through the Roblox Client. So, let’s move on to the final layer of the value chain Roblox has vertically integrated itself into.

The means to capture value (i.e Get rewarded for value created)

Developers who invest time and effort in building and publishing games need to be incentivized to keep on doing so. That’s how the flywheel keeps spinning.

And if you read Jaryd’s deep dive on Why Vine Died, you’ll see how Vine’s failure to compensate their creator community was a leading factor that led to their failure.

Why Vine Died: Closing The Loop On The Company That Changed The Internet

Jaryd Hermann

March 28, 2023

Read full story

But, Roblox is not making that mistake. Through rich analytics and monetization, they allow creators to get paid in actionable insights and Robux.

Analytics, driving game improvements, and rewarding progress as a developer: With content live and in front of lots of users, Roblox provides a rapid and rich feedback loop on how people are engaging with a creator’s work. This feedback loop is driven by both their integrated analytics system and the Roblox monetization mechanisms, and together, creators have the means to improve what they’ve built both in terms of quality and revenue potential.
Monetization through the Developer Exchange (DevDex): Depending on where, how, and how aggressively creators choose to charge for their games, they earn Robux. And with earned Robux, they can withdraw their earnings out in cash.

At the end of the day, these three pieces (the means to create, distribute, and capture value), which work in concert, create the Vertical Integration Flywheel. And to abstract that flywheel more broadly, it means: a user creates a thing and shares it with other people who then adopt the product to create more things, all through the same platform.

Like we said earlier, Roblox’s biggest competition is Epic Games, both as a gaming company and as a metaverse play. And now that we’ve seen how Roblox has integrated across the gaming value chain, this graphic from How Epic Games Grows illustrates just how similar the two gaming giants are.

Both Roblox and Epic have mastered the chessboard that is the gaming industry. Their strategies are both ones of vertical integration, giving them a finger on all the pieces on the game board. For now, the main differentiator between the two is how Roblox it doesn’t make any of their own content…it’s all community.

So, let’s explore that advantage in more detail.

Community as a Product: The Citizens, Builders, and Culture of The Virtual Economy

Lots of companies have communities around their product. Like Salesforce, where 83% of questions asked by Salesforce customers are answered by other customers. Or like Notion, with a vibrant community of template-builders (read: How Notion Grows). These types of “communities of product” are an excellent source of product innovation and community-led growth. User innovation here is a nice-to-have.

But, in a few rare cases (social media) there’s what we call “community as the product.” Here, community is fundamental, and the reason people show up—the underlying unit of value— is to engage with others.

Okay, let’s quickly define community. And who better to describe it than Bailey Richardson, Head of Community at Substack?

Communities are groups of people that keep coming together over what they care about. The most vibrant ones offer members a chance to act on their passions with each other. Around five years ago, the word ‘community’ started to show up as a euphemism for users or audience. Communities are sacred. They imply a level of connection, advocacy, and energy on the part of the people who are showing up.

And to pull the thread there a little more. Let’s compare “community” to “audience”. To create an audience, you help people directly. A one-to-many relationship. To create a community though, you help people help each other. A many-to-many relationship. Community-led enterprises like Substack and Roblox build spaces for consumers to create value for each other. They pass the torch.

Audience vs Community: What's the difference? — Source: Ruben Lugo

When Roblox went to market back in the mid-2000s, they made a few of their own games in order to attract people to the platform and seed an audience. A smart strategy, because communities develop from an audience of like-minded people.

Later, once they had an audience engaging with the platform and starting to (1) create their own content, and (2) engage with others’ games, they stopped producing their own games. The torch was passed, and it was up to the community to create everything.

From then on, the people on Roblox—with shared passions and motivations—were the players (citizens), developers and trendsetters (builders), and moderators (lawmakers) of this virtual economy. Nay… a virtual country.

Yes, Roblox is a virtual country

Just entertain the thought for a second.

What makes a country?

To distill it down, to be a country, you basically need:

A stable population/community: Roblox has 214M monthly active players (putting them in the top 6 of 2023 populations)
A defined territory: There is a consistent space for those 214M folks to enter Roblox
A form of government: Besides community moderation and developers making rules, Roblox’s platform serves as a governing layer.
Capacity to enter into relations with the other states: Builders within Roblox can collaborate with builders of other games (states).
Culture: Each game/experience has its own micro communities surrounding it, all part of the larger Roblox community. Each of those communities forms its own norms, memes, lingo, and trends.
Technology: The Roblox platform and infrastructure
Education: Community members share open-source assets, create tutorials, and help other developers make and grow games (i.e. states, cities, towns, villages…depending on size).
Economy: Builders set prices, choose what to charge for, and with Robux as the virtual currency, there’s a globally accepted means of payment between citizens.

And on “a GDP basis” (looking at Roblox’s revenue), they’re not doing too badly. 👀

Okay, but what’s the point of comparing Roblox to a country?

Well, countries largely grow based on democracy and capitalism. Since the community is free to move between games and creators as they choose (democracy), and builders are motivated to keep innovating and growing their own revenue (capitalism + the IKEA effect), Roblox has two of the most powerful country-building forces in the world helping their business grow.

Maybe that’s a leap. Maybe it’s total nonsense.

But, when considering they are building a virtual space totally built by a community, it doesn’t seem like such a crazy thought. 🤷‍♂️ They are building a metaverse, after all.

Either way, there’s zero doubt that community is a massive moat for Roblox with lots of advantages, and as a strategic discipline, is a force multiplier for their product and growth efforts. One such advantage we briefly touched on earlier is that Roblox hardly has to acquire users, because…

Roblox is not sold, it’s adopted

Many product-led companies focus solely on the traditional buying funnel. The need for value capture is obvious and undiminished: generating pipeline, qualifying, and closing prospects, is the direct route to growth and making money.

The classic buying funnel (and now more so, loops, not funnels) has been the primary framework used to acquire customers since the beginning of Internet businesses. But, the relationship between companies and customers is changing. It’s becoming less about sales and marketing, and more about self-discovery and recommendations from a community.

Roblox’s growth is predicated on the community finding value, and in turn, spending social capital to make the community bigger. This is the community/social flywheel.

Users join and play with friends.
They invite more friends, driving organic word-of-mouth growth
As users join, participate in, and build engaged communities, the Roblox platform (…country?) becomes more valuable.
They invite more friends…🔂

For Roblox—or other community-centric products—they get to enjoy the holy grail of software: the product doesn’t need to be sold, as it’s adopted.

A wonderful thing for customer acquisition costs, which means more capital can be invested into R&D and making the creator ecosystem better. And as Roblox’s suite of creator tools gets better, this drives another reinforcing network effect that allows them to continually grow without additional stimulus required by Roblox.

Roblox’s growth flywheel: The UGC and developer loops

A significant part of our business strategy and culture focuses on long-term growth and developer, creator, and user experience over short-term financial results. We expect our expenses to continue to increase in the future as we broaden our developer, creator, and user community, as developers, creators, and users increase the amount and types of experiences and virtual items they make available on our platform and the content they consume, and as we develop and further enhance our platform, expand our technical infrastructure and data centers, and hire additional employees to support our expanding operations.
— Roblox S-1 filing

To break that down, we see 7 steps that nearly perfectly summarize how Roblox grows:

Developers build, publish, and operate virtual experiences on Roblox.
The growing variety of content attracts more users.
More daily active users—and more developer contributions to the creator marketplace— attract more developers. Also, as the engine gets better, more professional developers who generate more polished games join.
The quality of the content increases.
More users join, spend more Robux, and invite others into the community
This makes Robux a valuable incentive for developers to keep publishing valuable virtual experiences.
And…repeat. 🔂

Visualized (and condensed), it looks like this:

This virtual economy built by UGC has enabled Roblox to build a vast world much faster than they could have done so themselves and is a significant factor in growing and sustaining their ~214M MAUs. As David says:

Our community is immensely more powerful than anything we could do, and our community creates better content than we could create. They help us monetize in ways we never could. They attract viral users in ways we haven't been able to do. Their games are fun. So, it's really trusting the power of our community. We have this vision of creating this platform where people play in new and unstructured ways, where they learn together, where there's a new generation of creators.
— David Baszucki

One issue with this flywheel though—particularly in getting “more developers”—, is how the game revenue tends to skew towards a few top creators. Combined with that, Roblox has a hefty take rate, paying out approximately 30 cents per dollar spent. Which, as Mario Gabriele describes, creates a problem:

The existing developer economics of the Roblox creator ecosystem reinforces [uneven distribution] by disincentivizing investment from professional developers into the platform. Specifically, the unfavorable revenue split discourages sophisticated developers from investing in Roblox because the platform's terms preclude:
Paid user acquisition. Given the small share of revenue received by the developer, it is likely unmanageable to profitably grow a game to a meaningful scale using Roblox's advertising tools, given that the developer bears all marketing costs.
Significant upfront development costs. The more ambitious a project, the more it is likely to cost to develop. Yet, large, sophisticated studios are potentially repelled from the Roblox ecosystem relative to other ecosystems that offer better developer economics for publishing.
[Cost of goods sold]. Any variable expenses, such as IP licenses that are generally paid out as a percentage of revenue, are difficult to support given how little money the developer is taking from game revenues. This means developers that have the opportunity to work with big brands and IP licensors will publish elsewhere.

Towards ironing out that kink in an otherwise stellar growth engine, here is what Roblox is doing to improve its developer appeal:

The majority of Roblox's engineering team is focused on increasing performance and delivering a better game engine, allowing for larger, more technically-impressive, games.
They continue to cover otherwise expensive infrastructure, such as cloud hosting
Roblox is also focusing on attracting smaller indie game studios that may have failed to develop commercially successful games on other highly-competitive platforms like the Apple App Store.
As covered earlier, Roblox is improving distribution with better game discovery and investing in a better native advertising platform.
They are expanding the ability to earn with Premium Payouts (think YouTube or TikTok’s engagement payments). On top of direct micro transactions, this allows developers to earn Robux based on the share of time that Premium members engage with their experiences.

These steps (and this as a strategic priority) are essential in keeping Roblox relevant and retaining its users. If they drop the ball here, going back to that fight for attention and developers…Roblox may lose that game to the likes of Epic.

And speaking of games, let’s wrap it up with…

A Future Beyond Games

In 2021, Roblox stopped referring to itself as a platform for “games”. Instead, it became a platform for “experiences.” This change was catalyzed by Epic’s lawsuit with Apple: Epic sued Apple for allegedly stifling competition on the App Store, and shone a spotlight on Apple’s different treatment of apps vs. games.

Apple’s marketing head, Trystan Kosmynka, noted during the trial that Apple didn’t consider Roblox to be a place where people go to play games, saying, “I look at the experiences that are in Roblox similar to the experiences that are in Minecraft. These are maps. These are worlds. And they have boundaries in terms of what they’re capable of.”

Just as a fun and unexpected example of that: a developer made a 3D visualization of their AWS instances to review their company’s usage of the cloud infrastructure platform. Odd, but creative. You can watch this in action here.

*The immersive 3D view of a company’s AWS instances. **Source:** Scott Beaudreau*

Taking no chances, on May 14th, 2021, Roblox removed “game” from its platform. The games tab became the discover tab, with a Roblox representative telling Polygon: “The term ‘experiences’ is consistent with how we’ve evolved our terminology to reflect our realization of the metaverse.”

In fact, the word “experience” was likely a better fit all along. Roblox is less a gaming company than a next-generation social network—a platform for building and sharing immersive virtual environments. This continues the internet’s march toward ever-more-immersive content, as Rex wrote about in last month’s Digital Native piece, 3D Content and the Floodgates of Production:

And in this move, Roblox has already seen Gucci create Gucci Town, a 3D shopping experience, and Yoga-gear maker, Alo, launch an actionless sanctuary for people’s avatars to meditate and get mindful in the metaverse.

Indeed, Roblox is moving beyond games. And for continued growth across gaming, experiences, and whatever else the metaverse holds in store, the key for Roblox will be mastering a few challenges in the coming years:

Can Roblox remain relevant on new platforms (such as Apple’s Vision Pro) and new content formats like virtual reality and augmented reality?
Can Roblox continue to age up its userbase, while still capturing young users? Over 50% of users are now over age 12—will adults ever seriously use Roblox, and does adapting the platform for an older audience alienate the core demographic?
Can Roblox make its creator tools more accessible and intuitive, integrating generative AI to crowd in more creation, and fuel more experiences on the platform? Will developer economics support more creation?
Can Roblox maintain its vision of becoming a metaverse, despite potential macro headwinds of negative sentiment towards it from investors, parents, and customers?

If you have any thoughts…share them in the comments below. We’d love to hear what you think.

How They Grow