9- 5 2 3 - 0 28
F EBRUARY 15, 2023
AYELET ISRAELI
NICOLE TEMPEST KELLER
Roblox: Virtual Commerce in the Metaverse
In August 2022, Enrico D’Angelo (HBS MBA 2004), VP of Product, Economy at Roblox, shut down
his computer for the night. He had spent the day preparing for RDC, Roblox’s annual Developer’s
Conference. While many simplistically referred to Roblox as a gaming platform, the company’s vision
was to become a “Metaverse Utility,” a co-experience platform where people came together in
immersive 3D experiences to socialize, work, play, learn, and purchase virtual and real goods. The
majority of the content on Roblox, including experiences and avatar items, was user-generated. Roblox
Studio, a free suite of development tools made the creation and publishing of 3D experiences easy to
learn. By 2022 Roblox hosted around 30 million experiences developed by 10 million developers.1
Launched in 2006, Roblox’s userbase grew consistently over the years, but the COVID-19 pandemic
accelerated Roblox’s growth and popularity. In 2020 alone, Roblox’s daily active users (DAU) increased
85%. As of Q3 2022, Roblox had 58.8 million DAU, including over half of all children and teens under
the age of 16 in the United States.2
Roblox earned revenues by selling the platform’s digital currency, Robux (R$), which users needed
to buy “in-experience” items (items that could only be used within individual experiences) and
“platform items” (accessories to customize their avatars that could be worn in any experience on the
platform.) Developers earned up to 70% of every R$ spent in their experience and on platform items.
Those earnings could then be spent back on the platform or exchanged into fiat currency. In 2021,
Roblox reported $2.7 billion in bookingsa and $659 million in operating cash flow. The company went
public in March 2021 (NYSE: RBLX) with a $42 billion valuation.3
In 2022, Roblox was looking for ways to maintain revenue growth in a post-pandemic era. The
company was considering two strategic initiatives that would not only enhance monetization, but also
help advance Roblox’s vision to replicate real-world dynamics in the metaverse. The first initiative was
the introduction of advertising. Roblox was considering leveraging brands’ interest in the metaverse
to create innovative, immersive advertising formats that felt native to the Roblox experience. The
company had experimented with traditional digital ads in the past, but had rolled them back due to
their negative impact on the user experience. The team believed that the immersive format would be
much more successful, but wondered how brands and users (and their parents) would react. The
a Bookings was defined as the amount of R$ purchased by users in a given period
Professor Ayelet Israeli and Senior Researcher Nicole Tempest Keller (California Research Center) prepared this case. It was reviewed and
approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and
not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of
primary data, or illustrations of effective or ineffective management.
Copyright © 2023 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
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second initiative was the introduction of scarcity in the “platform items” economy, whereby Roblox
would allow creators to only publish items in limited quantities. Part of the idea was to charge an
upfront fee for item creation, similar to a manufacturing fee. D’Angelo believed scarcity was necessary
to avoid excess supply driving down prices. Limiting quantities also meant that items would be
tradable among users, opening up a new platform-level use case. Culturally, however, Roblox users
and developers were accustomed to unlimited supply and low prices, and developers had operated in
an environment with virtually no upfront fees for a long time. Would these strategies drive excitement
and engagement among Roblox creators and users? How would this change impact the bottom line?
The Rise of the Metaverse
While there was significant hype and speculation about the metaverse in 2022, there was not yet a
universally agreed upon definition.b At the highest level, the metaverse was considered an evolution
of the internet into a deeply immersive, social, and synchronous experience – a persistent, shared 3D
virtual space that was interactive and hyper-realistic, parallel to the physical world. 4,5 People would
spend their digital life in the metaverse as their avatar and interact with others, taking advantage of
the unique possibilities offered by a boundless digital environment. Increasingly powerful computing
devices, cloud computing, and high bandwidth internet connections had opened the door for
metaverse opportunities.6
The market value of the metaverse was estimated to be between $200 to $300 billion in 2022, growing
to $4 to $5 trillion by 2030.7 Tech and gaming companies were investing heavily in the metaverse, with
Facebook rebranding itself as “Meta” in 2021 as it reimagined itself from a social media platform to a
“metaverse company, building the future of social connection.” 8,9 Microsoft, Apple,10 and Google11
were also investing in the market, along with other major players in the space, including Nvidia, Epic
Games (maker of Fortnite), Unity, Decentraland, and Roblox.12,13,14 Venture capital money was flowing
quickly into the market, with over $10 billion invested in 2021, up from $6 billion in 2020.15 While there
were cynics that believed the metaverse was more hype than reality, cautionary words harkened from
Bill Gates: “We always overestimate the change that will occur in the next two years and underestimate
the change that will occur in the next ten. Don't let yourself be lulled into inaction.”16
Brands were scrambling to understand how to leverage the metaverse to stay relevant with existing
customers and attract new customers. In the short run, brands saw the metaverse as an opportunity to
build awareness and engagement, but over time the metaverse could also represent a direct sales
channel, becoming a critical part of e-commerce. Marketing tools and tactics for brands would
dramatically shift in the metaverse where consumers were no longer looking at brands from the outside
in, but rather were active participants in immersive brand experiences.17 Some larger brands were
already dabbling in the metaverse, testing various ways to interact with customers. Given Roblox’s
large customer base, it was increasingly used as a metaverse testing ground for brands.
b The term “metaverse” was coined in 1992 by author Neal Stephenson in his science fiction novel, Snow Crash, where it referred
to an all-encompassing digital world that existed alongside the real world. The metaverse was again popularized in the 2011
dystopian science fiction novel, Ready Player One, where users escaped the deteriorating real world by accessing a metaverse
named OASIS through a VR headset and haptic suits.
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Background on Roblox
Origins
Roblox was founded by David Baszucki and Erik Cassel. After graduating with a BS in Electrical
Engineering from Stanford University in 1985, Baszucki started Knowledge Revolution, an educational
software company for teaching physics. At that time Cassel was a physics student at Cornell, where he
had developed software that was used in the physics department’s introductory lab experiments and
worked on a project that integrated physics with computer graphics.18,19 Cassel learned about
Baszucki’s related work and met with him. The two hit it off and Baszucki offered Cassel a job, marking
the start of a 20-year relationship.20 Baszucki and Cassel worked together on a novel 2D physics
simulation software, named Interactive Physics, which would later influence their approach for
Roblox.21 Knowledge Revolution was acquired in 1998 by MSC Software for $20 million and the duo
stayed onboard to continue their work. In 2004, they left MSC to start a company named DynaBlocks,
later renamed Roblox – a portmanteau of “robots” and “blocks.” Baszucki took on the role of CEO and
Cassel became VP of engineering. The Roblox website officially launched in 2006.
How Roblox Works
Roblox was an online platform where users came together to engage in experiences, create
experiences, and socialize. Roblox did not develop any of the experiences itself. Rather, the experiences
were all created by users on the platform (referred to as “Developers” hereafter) – a key point of
differentiation for Roblox. Developers used Roblox’s proprietary IDE (Integrated Development
Environment), named Roblox Studio, to create experiences. Roblox Studio had a low barrier to entry
due to its out-of-the box social/multiplayer functionalities, drag-and-drop 3D objects, user-friendly
scripting language, and active developer forum. Roblox handled the logistics and costs of hosting the
experiences on its servers – a model that resulted in no upfront fees for developers, in exchange for a
cut of developer earnings. By 2022, 10 million Roblox users had developed over 30 million experiences
on the platform, spanning multiple genres, ranging from very simplistic to deep and realistic
multiplayer experiences.22 However, usage was concentrated: 90% of time spent on Roblox was spent
in the top 1,000 experiences (Exhibit 1). The top five most visited experiences as of August 2022 were
Adopt Me, Brookhaven, Tower of Hell, Meep City, and Piggy.23
Avatars were an important component of Roblox: they represented users across all experiences on
the platform. Roblox was originally known for its blocky avatars, but over time more diverse and lifelike avatars were introduced to allow for greater self-expression, in addition to new technology, such
as ‘layered clothing,’ allowing any avatar to wear any type of clothing in any permutation, just like in
real life. Users would often customize their avatar with a range of user-generated accessories and
animations, created by other users (referred to as “creators” hereafter). Baszucki noted, “Self-identity
is a crucial pillar of the metaverse, and the ability to precisely customize your clothing to your unique
avatar is paramount in personal expression.”24
A key aspect to playing on Roblox was community and the opportunity to socialize with friends.
Users could text chat with each other on the platform. All chats were screened for inappropriate
content. In 2021, Roblox also started to offer voice chat for ID-verified users over the age of 13. Users
could access Roblox on their phone/tablet, on the Xbox, or on PC/Mac. Regardless of where users
accessed Roblox from, all users would play together.
Engaging with experiences was mostly free (there were a few paid experiences), but users had the
ability to purchase avatar items or in-experience items (e.g., unique abilities, special in-experience
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items) using R$. R$ could only be purchased from Roblox. As of mid-2022, one R$ cost, on average,
around $.012 (R$ were sold in packages with different discounts: e.g., in the US, 400 R$ for $4.99, 4,500
R$ for $49.99, etc.).25 R$ were purchasable across the various Roblox apps (PC, Mac, iOS, Android),
website, and via physical and digital gift cards.
On the other side, developers and creators could earn Robux in a variety of ways: selling avatar
platform items or in-experience items; earning engagement-based payouts (EBP) as a reward for highly
engaging experiences; and creating and selling assets and plugins within Roblox Studio. On the virtual
transaction side, creators of items received 30% of the price, the seller received 40%, and the platform
(Roblox) retained 30% (Exhibit 2). When the developer was also the seller (i.e., for an item sold within
their own experience), the developer would receive the full 70% share. If an item was sold in the Roblox
Marketplace, Roblox was considered the seller of the item, capturing 30% as the platform and 40% as
the seller, for a total of 70%.
Once a developer or creator earned 50,000 R$,26 they could convert it into real dollars using the
Developer Exchange (DevEx) program which used an exchange rate of $.0035 per R$ as of 2022.27
Developer and creator earnings were relatively concentrated, with about 600 of them earning more
than $100,000 in 2021 (Exhibit 3).
Userbase
It was estimated that over half of all North American children under the age of 16 were Roblox
users. Craig Donato, Chief Business Officer, explained the appeal of Roblox to kids:
You think about kids, compared to when we grew up. I used to come home from
school, get on my bike, and disappear till the streetlights came on. Kids’ lives today are
dominated by adult-directed after-school activities and then much more homework. So
the time they have to socialize is before bed. And the only way they can do it is to get
online with each other. It's just a different generation – they've lived their life differently.
The secret sauce of Roblox is we are the last bastion of free play.
Roblox core demographics ranged from 9 to 24 years, with 48% of its users being under the age of
13 (Exhibit 4).28,29 Over time, Roblox had been strategically expanding its appeal to users over the age
of 13, and by 2022, the 17 to 24 segment was the fastest growing segment.30 Roblox users were split
fairly evenly between male and female, due to the broad set of experiences on Roblox, ranging from
traditional gameplay to social gameplay across categories spanning sports, fashion, racing and
beauty. Users spanned the globe, with 32% from the U.S. and Canada, 29% from Europe, 14% from
Asia, and the balance from around the world.31 In 2021, the vast majority of users (75%) accessed the
platform through mobile devices (Exhibit 5). Donato discussed the generational difference in how
people viewed playing in the metaverse:
There are metaverse natives and metaverse colonists. People in the younger generation
are metaverse natives. They grew up with online gaming and the internet. They've never
known anything different. They've always been able to get on and interact with their
friends in 3D immersive spaces. When they pop into a game, their mind’s eye is in the
game. And it doesn't even matter if they're using their phone. They're inside the
experience. And this is how they've grown up – they're very comfortable socializing there.
People, like me, in the older generation are metaverse colonists. We see two worlds –
a physical world and a digital world, and we think the physical world is better – that's
how we’re wired. But metaverse natives don't see the difference – they live their entire
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life with one foot in both worlds. They see them as interchangeable. And they coexist in
both those places. It's hard for colonists to see that. And it takes a lot of discipline for us
to see it through their eyes.
Finances and Infrastructure
Roblox generated revenue through the sale of R$ (referred to as “bookings”). Due to generally
accepted accounting rules in the U.S., bookings were not recognized as revenues at the time the cash
was received because users did not receive value from Robux until they spent it. Therefore, bookings
were amortized as revenue over the expected lifetime of a paying user, which was estimated at 25
months. 32 As a result, bookings were higher than revenue. In 2021 bookings were $2.7 billion while
revenue was $1.9 billion (Exhibit 6). This resulted in the company being cash flow positive, yet negative
net income.
Roblox’s primary variable cost was third-party payment processing fees charged by various
distribution channels and payment providers. While the app stores generally charged a 30%
commission for sales of R$, other providers had lower processing costs, resulting in an average cost of
sales of approximately 25%.
Other notable costs included developer exchange fees, and investments in infrastructure and safety
(see Exhibit 7 for the P&L statement). Developer exchange fees represented the amount creators cashed
out when they exchanged R$ into fiat currency, which totaled $538 million in 2021.33 Roblox built and
maintained its own technical infrastructure, rather than using external cloud computing services,
which drove continuous investments in data centers, servers, technical infrastructure, and customer
support.
Roblox also invested heavily in trust and safety to ensure the platform was safe and that users
abided by the platform’s rules. As Julian Walshaw-Vaughan, VP of Engineering, Economy, noted,
“Everything that we do is done through the lens of safety and civility.” Roblox used algorithms and a
dedicated team of human moderators to review any content uploaded onto the platform.34 Roblox also
invested heavily in people, with an emphasis on technical talent. As of 2021, Roblox had 1600
employees, with 75% in product and engineering functions.35
Roblox Mission and Values
Roblox’s mission was to “connect a billion people with optimism and civility” and its vision was to
“reimagine the way people come together.”36 To support these goals, the company had adopted an
internal operating system that defined the company’s values and principles. Roblox was steadfast in
its commitment to these values. D’Angelo noted, “Every decision on how Roblox operates is run
through our values.” Roblox’s four core values were:
•
Respect the Community — We consider our impact on the world, strive to respect everyone’s
best interests, and communicate authentically. We prioritize community before company,
company before team, and team before individual.
•
We are Responsible — We are responsible for both the intended and unintended consequences
of our actions.
•
Take the Long View — We set a long-term vision, even when making short term decisions.
Challenge the status quo, think big, and look for innovation in whatever you do.
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Roblox: Virtual Commerce in the Metaverse
Get Stuff Done — We drive execution by taking initiative and relentlessly iterating towards the
long-term goal.
Roblox in 2022
While Roblox was founded in 2004, the company only started to see significant growth in DAU in
the 2010s. During the COVID-19 pandemic, as the world shifted to remote learning and remote work,
Roblox saw rapid growth of its user base, as the number of DAU tripled from 17.6 to 52.2 million
between 2019 and 2022.37 Users from 180 countries spent 41 billion hours on the platform in 2021, an
average of 2.5 hours per DAU each day.38
After raising $335 million in venture funding over the span of 17 years, Roblox went public via a
direct listing in March 2021 (NYSE RBLX) at a valuation of $42 billion.39 After reporting stronger than
expected Q3 2021 results, the stock soared 50% in November 2021 to its all-time high closing price of
$134.7 per share.40
As a public company, Roblox faced pressure for growth and profitability. In addition, the pace of
growth in revenue, bookings, and DAU seen during the pandemic was hard to maintain. While the
company had delivered revenue growth in every quarter since 2019, in Q1 2022, revenue fell 6% from
the prior quarter, while bookings declined 18% (Exhibit 8a and 8b). While revenue and bookings grew
again in Q2 2022, the rate of growth was slower than expected. Roblox believed that the key to
profitability was growing its user base, with a stated goal of reaching 1 billion users by 2030. User
growth would translate into bookings growth which would help the company cover its fixed costs.
However, investors were wary after DAU fell in Q2 2022 – the first time since 2018. By August 2022,
Roblox’s share price had decreased 50% for the year compared to a 13% decline in the S&P and a 20%
decline in the Nasdaq, and its market cap had fallen to $21 billion (Exhibit 9).
Challenges and Opportunities for Roblox
Roblox was pursuing several growth opportunities to increase its userbase. First, the company was
expanding its age demographic, focusing on the 13+ and 17+ segments by improving its underlying
tech and tools to allow developers to build more sophisticated experiences, and by improving the
quality and personalization of Roblox’s search and discovery system.41 Roblox was also encouraging
the development of experiences that might appeal to older users, such as yoga, travel, and events, such
as the popular Lil Nas X concert hosted on Roblox in November 2020 that attracted more than 33 million
visits.42,43 The company hoped these strategies would help it to both attract new users in the older age
segment and retain users on the platform who were at risk of aging out and moving to a competing
platform. Second, the company was expanding geographically by building automated translation
features so that experiences could be automatically published in multiple languages and users could
seamlessly communicate with each other in different languages.44 Roblox was showing strong growth
in markets like South America, Asia, and Eastern Europe. However, as Roblox grew in these regions,
it put pressure on Roblox’s business model. Walshaw-Vaughan explained:
The challenge for our business model right now is the way that you make money on
Roblox as a developer is you build an experience, someone comes into your experience
and spends money – they buy an item, pay for access, etc. Then Roblox and the developer
take a share of that. That's great for countries where there's a lot of disposable income. It's
not so great for South America or India where there's less disposable income.
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Bear in mind that Roblox is free to play. You don't have to spend any money in any of
these experiences. But there's a cost to Roblox to serve the games – infrastructure cost,
hardware cost, CPU memory. And we’re very focused on being highly performant, which
means we have data centers all around the world. For some countries, we ultimately pay
more than what we make with our business model. To achieve our goal of getting to 1
billion connected users in 10 years, we will need different ways to monetize.
Roblox was facing two key monetization decisions – how to leverage brands’ interest in
participating in the metaverse and convert it into ad spend (a new revenue stream for the platform),
and whether to move to a scarcity economy where all published items would be limited in quantity,
hence driving desirability/collectability, higher prices, and creating secondary market exchanges.
Importantly, both of these strategic options were in line with Roblox’s vision to replicate real-world
dynamics in the metaverse, the Roblox way.
Engaging with Brands
Roblox’s high engagement numbers piqued the interest of brands looking for a way to participate
in the metaverse and to attract young users where they were spending their time. As Cathy Hackl, chief
metaverse officer at Future Metaverse Labs, explained, “Just like you wanted to catch the kids at the
mall, it’s the same thing. Most of these kids aren't on Instagram or other platforms — this is their social
network.”45 Christina Wootton, VP of Global Partnerships, added, “Brands know they need to engage
young users in the metaverse because if they don’t engage them now, they may not be relevant to them
in 10 years.” However, most brands did not know how to work with Roblox. Wootton explained:
Our main role is to educate brands and talent. Many brands will come to us and say,
“We want to be the metaverse. But we don't know exactly how to enter or where to start.
Sometimes they don’t realize how social it is – how much people are socializing and
connecting on Roblox. We educate them on what the opportunity is and how they should
be thinking about it in the right way. It's not just an ad. It's not just a product you're trying
to get in front of users. It’s about creating something that's fun and immersive.
Brands were experimenting with a variety of approaches on Roblox. Some sold branded virtual
items in the Roblox Marketplace. Others were offering branded experiences within other experiences.
For example, NASCAR allowed users of the game Jailbreak to create and design the next NASCAR and
then drive it in the Jailbreak experience. Mariah Carey launched a Christmas concert inside of
Livetopia. Other brands invested in developing their own branded experience on Roblox, in which
users could buy branded virtual items. Finally, some brands had taken it even a step further and offered
a way to drive real world activations from their branded experience. There were also opportunities for
brands to monetize outside of Roblox as users played in the Roblox experience and then might visit the
brand’s website to purchase a physical version of an item they had seen on Roblox. Longer term, Roblox
envisioned a way for users to purchase real-world items directly from a branded experience on Roblox.
Early brand adopters on Roblox included Gucci, Vans, Nike, and Tommy Hilfiger.
In May 2021 Gucci introduced a 2-week limited time experience on Roblox called Gucci Garden.46
Users entered different themed rooms that visually simulated patterns and images from past Gucci
campaigns.47 In the rooms, their avatar was transformed into a blank mannequin that absorbed
different visual elements of the environment, transforming the avatar into a unique “canvas” (Exhibit
10). Many users took screenshots of their avatars to share with their friends. Users could also buy
limited digital Gucci goods which could then be used anywhere on the platform. As Wootton
explained, “Our audience is very aspirational. They may not be able to buy Gucci in the real world, but
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they love Gucci. And they want their avatar to wear it.” The limited Gucci items became valuable
collectibles. For example, a digital Gucci Dionysus Bag with Bee that originally sold for 475 R$ (around
$6), resold for 350,000 R$ (around $4,115) – almost $800 more than the real-world version of the bag.48
In another example, Vans launched an experience on Roblox in September 2021 named Vans World
– a virtual skatepark inspired by real world skatepark destinations (Exhibit 11). Users could practice
tricks, compete in challenges, customize their avatar with Vans-branded shoes, apparel, and
accessories, and design their own virtual skateboard. Users were given one free Vans item when they
entered the experience, but paid for additional items. Mike Guthrie, CFO, discussed the dual impact of
engagement and monetization for Vans, “It’s an interesting model because the brand is getting a lot of
eyeballs, which they know how to value. But they’re also selling these virtual items, so making money
running a virtual store, if you will. The level of engagement is pretty high. A user could be in Vans
World for an hour. That’s a lot of interaction with the brand. That’s hard for brands to replicate,
especially online.”
Chipotle took a different approach with the launch of its Burrito Builder experience on Roblox in
April 2022. The first 100,000 users to successfully roll a burrito on the experience earned virtual
currency, which could be exchanged for a QR code to be used to redeem a free burrito at a physical
location.49 This experience marked the first time a brand on Roblox had enabled users to exchange
virtual currency for real-world items. Chris Brandt, Chief Marketing Officer at Chipotle commented,
“We’ve tapped into play-to-earn, an emerging engagement model in the metaverse.”50
Brands typically relied on developers on the Roblox platform to build their experiences, often using
Roblox as a matchmaker. Wootton explained: “Brands will say to developers, ‘Here’s what our brand
objectives are. But how do you think we could bring it to life authentically on the platform?’ And that’s
where the developer will give the brand advice based on what they have seen.” Developing branded
experiences represented another source of revenue for Roblox developers. Guthrie commented, “We
want our developer community to be able to build their business and grow their business. And if
brands are a source of growth, we think that’s great.”
Since brands did not yet have a dedicated metaverse budget, funds for developing Roblox
experiences were coming from a variety of sources, including social media, games, licensing, and
general marketing. Agencies were also scrambling to get up to speed. As Donato explained, “Just as
they had to figure out how to build a social media presence back in the day, they’re now going to need
to learn how to build interactive experiences.”
Advertising
Roblox was considering offering brands the opportunity to advertise directly within experiences to
drive brand awareness and direct traffic to their own branded experiences. Advertising could also be
offered to developers on Roblox who were looking to drive more traffic to their own experiences. Before
2022, ads on Roblox had been limited to traditional banner ads and sponsored listings on the Discover
page where players searched for new experiences. No ads had been allowed within Roblox experiences
since Baszucki’s goal from the start was to primarily monetize the business through transactions, not
ads. Over the years, there had been a healthy debate within Roblox about advertising. Guthrie
explained:
There is no doubt we could have turned on our ad product on a long time ago. But
we’ve been very experience-focused and previously we were concerned that advertising
had the potential to dampen the experience, which could, in turn, slow user growth and
reduce engagement. And we’ve also been cautious about advertising to kids even though
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traditional media advertises to kids. So what pencils out easily in a spreadsheet has been
a vibrant debate inside the company.
However, advertising made economic sense. Roblox had over 58.8 million DAU, with over 13.4
billion hours of playtime.51 Yet, only about 1.3% of Roblox’s DAU spent money in a given month.52 By
selling ads, Roblox could monetize more of its userbase, especially in regions where spending was low.
Moreover, a high percentage of the ad revenue would flow through to the bottom line, improving
profitability. If Roblox did open up advertising, it would be the first major, free-to-play platform to
implement immersive in-game advertising – something several other video game companies were
racing to do, including Microsoft’s Xbox and Sony’s PlayStation.53
Two kinds of immersive ad formats were being proposed: image and portal. The image format
would be 3D images that could be dropped into experiences, such as on a billboard, at a bus stop, or
on top of a cab, that would match the style of the experience.54 The portal format would transport users
to another experience within Roblox (traditional games or branded places like a coffee shop or a shoe
store, where they could engage more with the brand).55 However, portals would not take players out
of the Roblox platform to a brand’s website. Guthrie discussed the banner ads approach:
As we say, “If you see it in the real world, you probably will be able to find it on
Roblox.” In the real world, we see advertising everywhere we go. We see billboards on
the freeway. So there’s an offline analogy to the immersive advertising we are envisioning
which would be part of the scenery, if you will. That’s less obtrusive than pre-roll ads that
you see, for example, on YouTube that blast an ad at you and require you to watch.
Walshaw-Vaughan added:
We are an engagement-focused company. Engagement is one of our top metrics.
Advertising, in general, takes down engagement. So we want to make sure we do ads in
an authentic, immersive Roblox way so that it reflects the real world as much as possible.
Ads should be interactive, fun, and engagement-neutral. That is the goal with ads – to
make them immersive so it doesn’t drive people away.
Advertisers would be able to select specific demographics such as age and location, so not all
players within an experience would see the same ads. Pricing would be based on impressions (for
images) or transports (for portals), under an auction-based system. The developer of the experience in
which the ad was placed would also get a cut of the ad revenue.
Roblox had to tread carefully with advertising. In April 2022, consumer watchdog group, Truth in
Advertising (TINA), filed a complaint with the FTC claiming that Roblox had failed to abide by truthin-advertising laws. TINA argued that Roblox “blurs the line between marketing and entertainment
such that a reasonable consumer—and specifically children—cannot distinguish organic Roblox
content from advertising or promotional content.”56 Bonnie Patten, Executive Director of TINA.org
explained, “Deceptive advertising in the form of hidden advergames, undisclosed influencer
marketing and unsubstantiated income claims has found a new home in the Roblox metaverse with
potentially disastrous results for consumers, particularly children.”57
Moreover, in Fall 2022, the White House announced new reforms for the tech industry titled
“Enhancing Competition and Tech Platform Accountability” focused on the use of data for advertising
purposes.58 One of the six principles for reform was targeted at protecting children, stating that
“Platforms and other interactive digital service providers should be required to prioritize the safety
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and wellbeing of young people above profit and revenue in their product design, including by
restricting excessive data collection and targeted advertising to young people.”59
To address these concerns, Roblox’s new advertising proposal would limit ads to players 13 and
older, and Roblox would continue to not allow cross-platform behavior tracking. Guthrie commented,
“The platform has been aging up. Today more of our users are over the age of 13 than under the age of
13. So we're not advertising to a nine or 10-year-old. We're advertising to a teenager or a young adult,
and I think people feel differently about that.” Roblox also planned to carefully select the types of
advertisers it would allow. For example, ads for alcohol, gambling, and weapons would not be allowed.
Asking brands to explore innovative, immersive advertising, as opposed to the more traditional
social media advertising they were accustomed to, presented challenges. For example, brands were
familiar with the performance they would see from other forms of digital advertising, but the lift
associated with an immersive ad in the metaverse was untested and unknown. D’Angelo discussed the
dilemma, “Do we lead our advertising efforts with really innovative formats that are only possible in
the metaverse, but that advertisers are not used to? If we do, they might spend a little bit of money to
try this out, like experimental budgets. But will they spend the same amounts they spend on Meta and
Google?” Roblox also knew that pursuing the more innovative, immersive advertising would require
a different sales approach – one focused on educating brands. D’Angelo explained:
If you want to do video sales, it's really about a traditional sales force. That’s hundreds
of people knocking at every door, and building demand volume. It’s a numbers game.
Immersive advertising is more likely to require education on what it means for a brand to
be in the metaverse, what the different strategies are, and therefore how you advertise. In
a way, it’s an advisory business first, sales second.
Finally, Roblox recognized that this more innovative approach would slow down revenue from
advertising. If Roblox wanted to adopt a go-fast approach, which would guarantee a large and
predictable revenue stream, it could use third-party APIs to source ads from third-party platforms,
instead of generating organic demand by working with brands to experiment with different native
formats. However, Donato cautioned about moving too fast:
There's no question we could ramp up ad revenue really fast. And that would likely
be positively reflected in our stock in the short run. The question is, is that the right longterm thing to do? I believe we have to play the long game and focus on innovation to drive
long-term value. If you're trying to optimize revenue, you'd make a very different choice.
Shifting to a Scarcity Economy
Roblox was also grappling with the idea of shifting to a scarcity economy, where every item sold in
experiences and on the Marketplace would have a pre-set quantity. Up until 2022, all user-generated
items had been sold in unlimited quantities. Only a handful of “limited” items had been offered on the
platform, all made by Roblox itself (called “Roblox Limiteds”). The concern was that over time, as the
supply of items grew, it could become increasingly difficult for creators to differentiate their products
except through price. This could drive down prices across the platform, hurting both creators and
Roblox itself. Roblox was concerned that as supply continued to grow, prices would race to the bottom.
One solution being proposed was to move to a scarcity economy whereby all items sold on Roblox
would be limited in supply. The goal was to reduce supply and incentivize collectability at scale.
Roblox would achieve this through a series of economic costs and incentives for creators, similar to
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what manufacturers faced in the real world. Creators would have to ‘declare’ how many items they
wanted to create for any SKU and pay an upfront “manufacturing fee” determined dynamically by an
algorithm taking into account a host of factors – for example, the complexity of the item’s design (e.g.,
geometry and texture), its uniqueness, the time of year it was being sold (holiday seasons commanded
higher values), and what the market conditions were at that time, based on supply and demand for
similar items. D’Angelo explained: “You might get two different fees for the same exact item on
different days, because of market conditions. Right now, if the supply of shirts is low and you want to
put a shirt in the Marketplace, the fee is going to be low. But if everybody sees the hot, high-end brand
shirt and starts selling similar shirts, the fees will reflect that.”
Another factor that could be taken into account was whether the creator had a “verified badge.”
Roblox had recently implemented the “verified badge” system to distinguish and authenticate popular
creators. To qualify for a badge, developers on Roblox would need to meet a threshold number of visits
to their experience, and creators would need to meet a threshold value of sales of their items. D’Angelo
addressed concerns that the verified badge system might benefit larger creators over smaller ones, “The
larger developers started from nothing and they got to where they are. They had to work to get here.
The criterion for getting a verified badge is the same for everybody. As long as the rule is objective,
that there's a clear, mathematical way to determine it, and Roblox is not going in and picking winners
– then culturally speaking, that’s OK for us.” Brands would also be given verified badges to prove
authenticity – for example, an actual Nike item would be distinguishable from a look-alike product.
The manufacturing fee would, in effect, set a price floor for the item. Creators would still be free to
price the item as they wished. However, if creators chose to price the item below the manufacturing
fee, Roblox would still collect the full fee per item sold. For example, if Roblox set a manufacturing fee
of $10 for an item and the creator decided to give it away for free, Roblox still would take $10 on each
item sold. On the other hand, if creators decided to charge a price higher than the fair market value,
Roblox would take a 30% share of the higher sale price, thus capturing the upside of a premium price.
Roblox acknowledged that larger creators with deeper pockets could potentially afford to periodically
price below fair market value as a way to drive demand – something a smaller creator could not afford
to do. However, as D’Angelo explained there was a parallel to the real world.
In real life, if you’re starting up a clothing business, you’re not going to outspend Nike.
Instead, you focus on uniqueness of designs, viral marketing, influencers, etc. Larger
developers and creators on Roblox may discount prices every now and then, but I don’t
think it’s unfair. The metaverse is not trying to make everybody the same. It’s trying to
give you another route to build a business. The metaverse economy is based on the real
world. If you don’t have much money, you have to be craftier.
D’Angelo believed that the scarcity model would be especially attractive to brands, “The moment
you give brands the ability to publish limited collections, they will think about their participation in
the metaverse differently. They will be more thoughtful with the marketing, because when you only
sell 1,000 of something, you will be able to charge a higher price and you will be more likely to market
the items in advance.”
Under the scarcity model, a secondary market would naturally develop, whereas there was no need
for a secondary market when items were infinite in quantity. On the secondary market, both Roblox
and creators would get a cut of every transaction. This would represent something akin to a royalty
stream for creators, something they did not have access to before.
While many items might get resold at the same or lower price than the initial sale, some might
become “collectibles” and increase in price. Roblox had already seen the potential value created in
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secondary markets through the resale of its own Limiteds, as several limited items were highly sought
after by the community and in some cases considered a status symbol. Matt Brown, Senior Director of
the Avatar Marketplace, explained:
We know that collectibles are engaging, even in our current system. Once you get an
item, it has utility – you can wear it, games can give you special capabilities because you
own it. And because it's all within Roblox, that works.
Roblox also believed that the secondary market might be a way to engage users with lower
disposable income who could trade items on the secondary market for R$ or other items. Brown gave
an example:
If Nike gave away 100,000 caps as promotional items, they would pay the platform to
be able to do that. Then users could acquire free caps. Nike's happy, they get the exposure.
It's basically an ad for them, a relatively cheap and effective one. And the players here –
the users who don't spend – suddenly have an item that may have value. They may be
able to resell it and make R$ that they can spend within the platform. So this magic of free
R$ would be subsidized by brands.
The company believed that the secondary market might also attract a new segment of users to the
Roblox platform. Brown explained, “These are people who wouldn't have engaged with the Roblox
economy previously, but they might come now, because we've made scarcity ubiquitous.”
Roblox anticipated that the secondary market would be large and would grow over time since
virtual digital items never left the platform. However, this raised a new concern that prices on the
secondary market could be driven down. D’Angelo explained,
Someone might say, “I don't care if I paid $10 for this hat. I don't want it anymore, so
I'm going to sell it for $5. At least I make back some money.” But then if no one buys it, the
person might lower the price to $3, then $2. If that happened at scale, all of a sudden we
have protected our primary economy by imposing the fair market value, but the
secondary economy – which over time is where most of the items will be – is not protected.
So how should we protect the value of our items in the secondary market? Is that
important? Maybe it's not important. Just like in real life, the fact that people can buy stuff
on eBay doesn’t mean that nobody is buying new stuff anymore. Some people still like to
buy new because there's a new model.
Since Roblox’s goal was to ultimately shift to all items being sold in limited quantities, the company
needed to sunset the sale of all previously unlimited items. Roblox planned to let creators know several
months ahead of time that their items would go off-sale. Any previously sold items would
automatically become “limiteds” and could be re-sold on the secondary market.
While Roblox had a general idea for how the concept of a scarcity economy would work, they also
knew that their users would help refine and adapt it. Brown explained: “I want the community to figure
out how to optimize this. In general, they understand Roblox better than we do. A lot of that is because
of the way that it grew organically. Our users very much understand each other, so we want them to
help optimize it.”
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The Next Move
D’Angelo had worked hard to develop the Roblox economy and was proud of how much it had
grown since he joined Roblox in 2018. Bookings had grown from $499 million at that time to $2.7 billion
in 2021.60 While the COVID-19 pandemic had contributed to Roblox’s rapid rise, it had also put
pressure on the company to live up to expectations and challenging year-over-year comparisons.
D’Angelo knew that changes were required to maintain growth on the platform, and he believed that
greater engagement with brands through ads and the move to a scarcity economy were key pillars to
the future growth of the platform’s economy. Yet these were major changes for Roblox, which had
placed enormous emphasis on its values, prioritizing its community above all others since inception.
On the brand side, D’Angelo needed to think through the implications of offering advertising within
experiences. On the scarcity economy side, he needed to decide if this was the time to roll it out. Would
it drive excitement and engagement among Roblox users, or be viewed negatively? Would it drive
bookings for the company through higher prices, greater monetization of users, and attracting new
users and brands to the platform? Or would the “race to the bottom” just transition from the primary
market to the secondary market? D’Angelo knew the developer community would have a lot to say
about these changes at the upcoming Developer Conference and he needed to be prepared.
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Roblox: Virtual Commerce in the Metaverse
Exhibit 1
Source:
Distribution of Experiences by Hours of Engagement, 2021
Roblox 2021 Annual Report.
Exhibit 2
Cash Payout Structure
Source: “Cash Payout Structure,” Roblox, https://create.roblox.com/docs/production/monetization/economics#cash-payoutstructure, accessed October 12, 2022.
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Exhibit 3
Source:
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Concentration of Developer and Creator Earnings
Roblox 2021 Annual Report.
Exhibit 4 Total Roblox Daily Active Users by Share of Users Under 13 (U13) vs Over 13 (O13) –
2019 to 2022
Source:
Roblox Q2 earning report.
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Roblox: Virtual Commerce in the Metaverse
Exhibit 5
Source:
Demographics of Roblox Users - 2021
Roblox 2021 Annual Report.
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Roblox: Virtual Commerce in the Metaverse
Exhibit 6
Source:
Roblox Bookings vs Revenue – 2019 to 2021
Roblox 2021 Annual Report.
Exhibit 7
Source:
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Roblox P&L – 2020 to 2021
Roblox 2021 Annual Report.
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Roblox: Virtual Commerce in the Metaverse
Exhibit 8a
Source:
Roblox Q2 22 Supplemental Materials, August 9, 2022.
Exhibit 8b
Source:
Roblox Quarterly Revenue
Roblox Quarterly Bookings Growth
Roblox Q2 22 Supplemental Materials, August 9, 2022.
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Exhibit 9
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Roblox Stock Price
Market cap:
$21 billion in
August 2022
Source:
“NYSE:RBLX,” Google Finance, https://www.google.com/finance/quote/RBLX:NYSE?window=5Y.
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Exhibit 10
Source:
“The
Gucci
Garden
Experience
Lands
at
Roblox,”
Roblox
blog,
https://blog.roblox.com/2021/05/gucci-garden-experience/, accessed October 12, 2022.
Exhibit 11
Source:
Scene from Gucci Garden
May
17,
2021,
Scene from Vans World
Roblox, press release, “Vans Launches ‘Van’s World’ Skatepark Experience in the Roblox Metaverse,” September 1,
2021,
https://corp.roblox.com/2021/09/01/vans-launches-vans-world-skatepark-experience-roblox-metaverse/,
accessed October 12, 2022.
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Endnotes
1 Rob Walker, “Roblox is One of the Biggest Metaverse Success Stories. So Why Hasn't it Turned a Profit?” Fortune, June 3,
2022, https://fortune.com/2022/06/03/roblox-gaming-ecosystem-metaverse-stocks-profit/, accessed October 12, 2022.
2 Roblox Corporation, “Roblox Reports Third Quarter 2022 Financial Results,” November 9, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2022/q3/RBLX-2022-FINAL.pdf, accessed January 25, 2023.
3 Dean Takahashi, “Roblox Goes Public at $41.9 Billion Valuation in Direct Listing,” VentureBeat, March 10, 2021,
https://venturebeat.com/games/roblox-goes-public-at-42-2-billion-valuation-in-direct-listing/, accessed October 12, 2022.
4 Tarek Elmasry, Hamza Khan, Lareina Yee, Eric Hazan, Greg Kelly, Rodney W. Zemmel, Shivam Srivastava, “Value Creation
in The Metaverse: The Real Business of the Virtual World.”McKinsey & Company, June 2022,
https://www.mckinsey.com/~/media/mckinsey/business%20functions/marketing%20and%20sales/our%20insights/value
%20creation%20in%20the%20metaverse/Value-creation-in-the-metaverse.pdf, accessed October 12, 2022.
5 Shamani Joshi, “What is the Metaverse? An Explanation For People Who Don’t Get It,” Vice, March 15, 2022,
https://www.vice.com/en/article/93bmyv/what-is-the-metaverse-internet-technology-vr, accessed October 12, 2022.
6 Roblox Corporation, “Roblox Corporation 2021 Annual Report and 2022 Proxy Statement,” May 26, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2021/ar/Roblox_Proxy-and-Annual-Report_WebReady_Bookmarked-(1).pdf, accessed October 12, 2022.
7 Tarek Elmasry, Hamza Khan, Lareina Yee, Eric Hazan, Greg Kelly, Rodney W. Zemmel, Shivam Srivastava, “Value Creation
in The Metaverse: The Real Business of the Virtual World.”McKinsey & Company, June 2022,
https://www.mckinsey.com/~/media/mckinsey/business%20functions/marketing%20and%20sales/our%20insights/value
%20creation%20in%20the%20metaverse/Value-creation-in-the-metaverse.pdf, accessed October 12, 2022.
8 Mark Zuckerberg, Facebook post, February 15, 2022, https://www.facebook.com/zuck/posts/10114316913387601, accessed
October 12, 2022.
9 Steve Kovach, “Mark Zuckerberg’s ‘Metaverse’ Business Lost More Than $10 Billion Last Year, and the Losses Keep
Growing,” CBNC, February 2, 2022, https://www.cnbc.com/2022/02/02/meta-reality-labs-reports-10-billion-loss.html,
accessed October 12, 2022.
10 Parkev Tatevosian, “Apple CEO Sees Big Potential in the Metaverse,” The Motley Fool, February 2, 2022,
https://www.fool.com/investing/2022/02/02/apple-ceo-tim-cook-metaverseinterested/#:~:text=Apple%20has%20a%20massive%20research%20and%20development%20budget&text=Meta%20said%20it
%20would%20invest,to%20entice%20people%20to%20join, accessed November 10, 2022.
11 Luc Olinga, “Google Wants to Catch Up with Web3, Metaverse Rivals,”TheStreet.com, February 2, 2022,
https://www.thestreet.com/technology/google-wants-to-catch-up-with-web3-metaverse-rivals, accessed November 10, 2022.
12 Steve Kovach, “Microsoft to Buy Activision in $68.7 Billion All-Cash Deal,” CBNC, January 18, 2022,
https://www.cnbc.com/2022/01/18/microsoft-to-buy-activision.html, accessed October 12, 2022.
13 Microsoft News Center, “Microsoft to Acquire Activision Blizzard to Bring the Joy and Community of Gaming to Everyone
Across Every Device,” Microsoft, January 18, 2022, https://news.microsoft.com/2022/01/18/microsoft-to-acquire-activisionblizzard-to-bring-the-joy-and-community-of-gaming-to-everyone-across-every-device/, accessed October 18, 2022.
14 Adnan Kayyali, “Top Seven Companies Developing the Metaverse in 2022,” Inside Telecom, May 10, 2022,
https://insidetelecom.com/top-seven-companies-developing-the-metaverse-in-2022/, accessed October 12, 2022.
15 Sophia Kunthara, “VCs Will Spend Billions More to Make the Metaverse a Reality,” Crunchbase News, November 16, 2021,
https://news.crunchbase.com/startups/metaverse-startups-funding-investors/, accessed October 12, 2022.
16 Nancy Weil, “The Quotable Bill Gates,” ABC News, https://abcnews.go.com/Technology/PCWorld/story?id=5214635,
accessed October 12, 2022.
17 Louis Rosenberg, Unanimous A.I., “Deception vs Authenticity: Why the Metaverse Will Change Marketing Forever,”
VentureBeat, August 21, 2022, https://venturebeat.com/ai/deception-vs-authenticity-why-the-metaverse-will-changemarketing-forever/, accessed October 12, 2022.
18 Cornell University, “Information for Physics Majors & Minors,” https://physics.cornell.edu/physics-majors, accessed
October 12, 2022.
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19 Cornell University, “Information for Physics Majors & Minors,” https://physics.cornell.edu/physics-majors, accessed
October 12, 2022.
20 “Eric Cassel,” MyHero.com, April 30, 2013, https://myhero.com/E_Cassel_xis_TW_2013_ul, accessed November 11, 2022.
21 Dean Takahashi, “Roblox Files for IPO, A First for User-Generated Game Platforms,” VentureBeat, November 19, 2020,
https://venturebeat.com/business/user-generated-game-platform-roblox-files-for-ipo/, accessed October 12, 2022.
22 Rob Walker, “Roblox is One of the Biggest Metaverse Success Stories. So Why Hasn't it Turned a Profit?” Fortune, June 3,
2022, https://fortune.com/2022/06/03/roblox-gaming-ecosystem-metaverse-stocks-profit/, accessed October 12, 2022.
23 “Most-Played Roblox Games Worldwide as of August 2022, By All-Time Visits,” Statista, August 2022,
https://www.statista.com/statistics/1220905/roblox-most-visited-games/, accessed October 12, 2022.
24 Taylor Hatmaker, “Roblox Pushes Toward Avatar Realism, Plans to Add NFT-Like Limited Edition Items,” TechCrunch,
October 14, 2021, https://techcrunch.com/2021/10/14/roblox-avatar-updates-rdc-2021/, accessed October 12, 2022.
25 “Buy Robux,” Roblox, https://www.roblox.com/upgrades/robux?ctx-nav, accessed October 12, 2022.
26 “Developer Exchange Terms of Use,” Roblox, January 31, 2022, https://en.help.roblox.com/hc/en-
us/articles/115005718246-Developer-Exchange-Terms-of-Use, accessed October 12, 2022.
27 “Cash Payout Structure,” Roblox, https://create.roblox.com/docs/production/monetization/economics#cash-payout-
structure, accessed October 12, 2022.
28 Roblox Corporation, “Roblox Corporation 2021 Annual Report and 2022 Proxy Statement,” May 26, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2021/ar/Roblox_Proxy-and-Annual-Report_WebReady_Bookmarked-(1).pdf, accessed October 12, 2022.
29 “Daily Active Users (DAU) of Roblox Games Worldwide from 4 th Quarter 2019 to 2nd Quarter 2022, By Age Group,” Statista,
August 2022, https://www.statista.com/statistics/1190309/daily-active-users-worldwide-roblox/, accessed October 12, 2022.
30 Roblox Corporation, “Shareholder Letter: Q2 2022,” August 9, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2022/q2/RBLX_Shareholder_Letter_FINAL.pdf, accessed October 12,
2022.
31 Roblox Corporation, “Roblox Corporation 2021 Annual Report and 2022 Proxy Statement,” May 26, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2021/ar/Roblox_Proxy-and-Annual-Report_WebReady_Bookmarked-(1).pdf, accessed October 12, 2022.
32 Roblox Corporation, “Q2 2022 Supplemental Materials,” August 9, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2022/q2/Q2'22-Supplemental-Materials-FINAL.pdf, accessed
October 12, 2022.
33 Roblox Corporation, “Roblox Corporation 2021 Annual Report and 2022 Proxy Statement,” May 26, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2021/ar/Roblox_Proxy-and-Annual-Report_WebReady_Bookmarked-(1).pdf, accessed October 12, 2022.
34 Roblox Corporation, “Roblox Corporation 2021 Annual Report and 2022 Proxy Statement,” May 26, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2021/ar/Roblox_Proxy-and-Annual-Report_WebReady_Bookmarked-(1).pdf, accessed October 12, 2022.
35 Roblox Corporation, “Roblox Corporation 2021 Annual Report and 2022 Proxy Statement,” May 26, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2021/ar/Roblox_Proxy-and-Annual-Report_WebReady_Bookmarked-(1).pdf, accessed October 12, 2022.
36 Roblox Operating System (OS) Principles, July 27, 2022, provided by company.
37 Roblox Corporation, press release, “Roblox Reports Second Quarter 2022 Financial Results,” BusinessWire, August 9, 2022,
https://www.businesswire.com/news/home/20220809005056/en/Roblox-Reports-Second-Quarter-2022-Financial-Results,
accessed October 12, 2022.
38 Roblox Corporation, “Roblox Corporation 2021 Annual Report and 2022 Proxy Statement,” May 26, 2022,
https://s27.q4cdn.com/984876518/files/doc_financials/2021/ar/Roblox_Proxy-and-Annual-Report_WebReady_Bookmarked-(1).pdf, accessed October 12, 2022.
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39 Dean Takahashi, “Roblox Goes Public at $41.9 Billion Valuation in Direct Listing,” VentureBeat, March 10, 2021,
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2024.
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This document is authorized for use only in Innovative and Technological Learning Services 's International Master in Business 10.4.2023 at SDA Bocconi Asia Centre from Oct 2023 to Apr
2024.