Authored by: Macky De Guzman, Sistine Luna, Nadine Mir
Edited by: Elijah Soriano, Ethan So
Introduction
Have you ever imagined becoming a brave dragon rider one moment and an iconic fashion mogul the next? To put it differently, have you ever wished to embark on an adventure through different realities and forge relationships along the way? For millions of kids around the globe, this dream becomes a reality through Roblox – a gaming platform that bridges together imagination, recreation, and connection.
The blueprint of Roblox first emerged from the minds of its founders, David Baszucki and Erik Cassel. Inspired by the potential of a physics simulation tool called Interactive Physics in 1989, they began exploring the idea of a new space online for meaningful shared experience that was fundamentally built and sustained by its users (Roblox, 2019; Baszucki, 2022). Compared to others in the industry, Baszucki and Cassel aimed to emphasize the aspect of ‘cocreation’ in their platform, which was made operational through user-generated content (UGC). As Baszucki expressed, “Roblox is about creation by the community, instead of for it” (Baszucki, 2022). Thus, in 2004, they went on to develop DynaBlocks and subsequently launched it as Roblox in 2006 (Baszucki, 2022).
The Roblox Model
Roblox operates a free-to-use gaming platform where people can come to play, connect, and create. As of 2023, the platform has over 68.4 million average daily active players from over 190 countries. Players enjoy over 13 million unique user-generated experiences, from shooters to roleplay, to obstacle games, and more. Players can invite their friends to play and interact with each other virtually. Players purchase an in-game currency called Robux to customize their avatars and gain access to exclusive games and other in-game privileges.
Meanwhile, developers build games and earn money by garnering engagement and creating exclusive perks and items (Larsen, 2024 & Schroeder, 2021). Roblox allows developers to make immersive 3D games through Roblox Studio, a free and user-friendly game development software. This toolset enables developers to design games and publish content with ease (Dodge, 2024 & Roblox, n.d.). After developers publish their games, they can earn Robux and can convert into real-world currency through a program called the Roblox’s Developer Exchange Program (DevEx).
Roblox also generates revenue through virtual brand events. Brands seeking to engage with highly active, youthful audiences turn to Roblox to create unique brand experiences. Using Roblox's development tools, brands can create interactive virtual spaces where players engage with their products through mini-games or purchase virtual versions of real-world items. Luxury brands like Gucci and Tommy Hilfiger, and retail giant Walmart have jumped into this bandwagon, allowing users to interact with brands in innovative and immersive ways (Cheung, 2023).
All this fosters thriving in-game economy, where both players and developers benefit from the platform’s expansive ecosystem. This strategy creates a flywheel effect – developers monetize their creations, incentivizing them to build more games, increasing partnerships with brands, and therefore attracting more players. As the platform grows, this cycle of content creation and user engagement drives both player satisfaction and Roblox's overall expansion (Schroeder, 2021).
Figure 1. Flywheel Graph of Roblox.
Source: Schroeder, 2021
Competitive Landscape
Popular gaming studios like Epic Games (known for Fortnite) and Activision Blizzard (home to Call of Duty, Overwatch, and Candy Crush) also offer extensive game libraries. All three companies offer games for free but monetize through in-game purchases and microtransactions. However, what sets Roblox apart is its highly accessible gaming and development experience.
Unlike Activision Blizzard, which does not permit public game development, both Roblox and Epic Games offer tools for UGC. Epic Games, however, requires more technical expertise as it utilizes high-level scripting languages like Python and charges a 5% royalty on published games (Cuofano, 2024 & Epic Games, n.d.). In contrast, Roblox offers a beginner-friendly development studio with Lua as its scripting language where publishing games does not involve any licensing fees (Roblox, n.d.). This makes Roblox a more attractive studio for developers.
Epic Games and Activision Blizzard attract mostly teenagers and adults, with a strong presence in esports and streaming platforms. Roblox, while most popular among children aged 5-12, is already expanding into older audiences. Players aged 17-24 now make up 38% of Roblox’s daily users, driven by new games that appeal to older teens and young adults (Bronstein, 2023).
Figure 2. Comparison of Roblox, Epic Games, and Activision Blizzard.
Source: Cuofano 2021; Johnston, 2022; Larsen, 2024; Schroeder, 2021
Financials
Despite the popularity and uniqueness of Roblox, their financials paint a mixed picture. It can be seen that despite a consistently growing stream of revenue since 2018, Roblox has actually never been profitable in this timespan. Instead, their expenses have actually grown in proportion to their revenue, as seen in Figure 3 below. According to Roblox’s 2023 Annual Report, a majority of their total expenses goes to research and development costs. This consists of personnel costs as well as expenses associated with maintaining and improving the platform. Roblox expects these costs to increase even further, indicating that it may continue to stay unprofitable in the near future.
Figure 3. Roblox Sales vs. Net Income (2018 - 2023)
Source: FactSet
Besides profitability, Roblox also faces a conversion problem. Conversion, in business contexts, is typically referred to as the process of converting prospective customers to paying customers. It is important to note that the majority of Roblox’s revenue comes from the sale of Robux. However, only a small portion of the playbase is actually paying with only around 852,000 unique paying users out of its 68.4 million active users or about 1.19%. This becomes problematic for the company as increasing users on the platform does not necessarily mean a higher profit. Hence, the company should look into how to increase the monetizability of their products.
Figure 4. Roblox Current Ratio.
Source: FactSet, Authors' Calculations
Figure 5. Roblox Free Cash Flow.
Source: FactSet
In terms of liquidity, Roblox has a positive current ratio and cash position as seen in Figures 4 and 5. This indicates that the company is still able to mostly cover its debt without needing to resort to the sale of long-term assets or equipment. Aside from debt not being much of a concern, Roblox is also in a good position to continue financing its operations moving forward.
Moving Forward
Among the plethora of gaming engines, Roblox gained increasing popularity due to its vast selection of user-generated games and premium customization options. On top of that, its free development studio stands out by providing easy-to-use tools unlike any other in the industry. These features have definitely helped Roblox to consistently grow their user base. However, Roblox wanes in terms of its financial strategy as it struggles to achieve profitability. Even though Roblox still manages to sustain operations with minimal reliance on debt financing, Roblox may not seem like an attractive investment at this stage. To ensure its long-term sustainability, Roblox needs not only to continue to improve its platform but also to focus on developing a more robust financial strategy.
References
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Johnston, M. (2022, March 17). How Activision Blizzard Makes Money: Activision segment generates most revenue. Investopedia. https://www.investopedia.com/how-activision-blizzard-makes-money-4799286
Larsen, R. (2024, March 20). How Roblox Makes Money: The Business and Revenue Model Explained | Untaylored. Www.untaylored.com. https://www.untaylored.com/post/how-roblox-makes-money-the-business-and-revenue-model-explained#:~:text=The%20Business%20Model%20of%20Roblox
Roblox. (n.d.). Frequently Asked Questions | Documentation - Roblox Creator Hub. Roblox Studio. https://create.roblox.com/docs/education/resources/frequently-asked-questions-education
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