What to Know About Roblox Going Public

Illustration for article titled The Roblox Boom Is About to Meet Reality

Photo: Ian Tuttle (Getty Images)

Today, the online children’s gaming platform Roblox is dumping 199 million shares of mammon onto the market through its direct listing, which likely means a Black Friday-level mob and hours of free content for CNBC’s Squawk Box on a yet-unprofitable company. Nothing new there, but it’s also an almost psychedelic amalgam of 2021 intergenerational imaginations: adults who would like to make magic money can soon place their chips on the perceived value of an economy of millions of mostly child consumers buying and trading virtual helmets. This is either nothing short of amazing or a completely foreseeable outcome of monetizing everything. In any case, it’s a good excuse to think about the long-term stability of the Roblox economy.

Roblox is sort of like a virtual Dave & Busters, with 50 million multiplayer games to choose from and avatar adornments kids can buy with funny money (one Robux = $0.01). With the stock offering, parents and kids overlap between two kinds of assets equally based on a sort of arbitrary value: in-game currency and memestocks. One redditor, who sounds suspiciously like he’s trying to sell us on Roblox stock, even has a pitch for kids on r/investing:

Kids love Roblox. On the school run I mentioned that we’ll soon be able to buy some shares in Roblox and that means we’d own a little piece and as Roblox grows and more kids buy Robux we’d make money and if we left it there for years and years in ten years you might be able to buy a car or something. They were super enthusiastic. I’m looking forward to having this experience with them win or lose.

Aside from multi-level marketing overtones, it saves the old childhood lectures about mowing lawns and savings accounts. This is 2021. Go shopping, tell your friends to buy digital golden scythes and rainbow tiaras, the act of which, in time, magically yields grown-up money, and then you get a car. Sweet! This leaves out the possibility of mutual disappointment in the event that kids stop buying Robux, leading to Robux inflation, maybe—a perfectly viable possibility that has happened in World of Warcraft. (Though that was due less to a lack of interest and more an unchecked gold supply.)

So what happens if the Robux crashes, and how does that happen?

Wait, what’s Roblox, and what does it want with the children?

Roblox is an online platform that supports a vast inventory of user-generated games and custom avatar items, created with Roblox’s proprietary tools. The Roblox worlds, which look populated by LEGO-like characters, can be set anywhere from a jail to the suburbs to hell and, notoriously, sometimes orgy rooms with functional but clunky genitalia. Play is free, but Roblox pushes users to pull out a credit card to buy the in-game currency, Robux, for status symbols like banana suits, spa masks, and sling pouches; Roblox further incentivizes users to pay monthly subscriptions to get more Robux than they would by paying the same price for one-off purchases.

Roblox launched in 2006 but has reined in a captive pandemic base, as of December, reaching 37.1 million developers up from 19.1 million in 2019. (Roblox wants to be very clear that stockholders shouldn’t expect continued explosive growth, writing in its S-1 filing with the Securities and Exchange Commission, “we do not expect these activity levels to be sustained.”)

Like Second Life, Roblox partially entices its users to generate reams of content with the promise of in-game currency, which can be exchanged for dollars.
Developers who create Roblox games can sell access to their games or keep them free. They can make some Robux when users buy stuff within the games, like special powers and jetpacks and pool tables, and then exchange Robux for dollars, and Roblox pays a stipend if enough people play your game.

If Roblox weren’t providing the service of fun, developer income inequality would look dismal. From September 2019 to September 2020, 99.22% of Roblox’s nearly 970,000 money-making developers got less than $1,000, while three people made over $10 million. Presumably, most make nothing at all; Roblox says in its SEC filings that it currently has almost 7 million developers building for it. Roblox’s latest S-1 revealed that trends were more or less the same from December 2019 to December 2020, with 99.5% out of an overall 1.27 million developers in the bottom income bracket.

This is possibly because it’s very hard to get your game noticed out of tens of millions, but it’s probably not helped by the fact that Roblox leaves literal fractions of pennies on the table for its creators. Its developer exchange rate sucks, for one; while a Robux costs $0.01 for the consumer to buy, Roblox only gives developers back $.0035 per Robux when they cash out. Roblox also takes 30% of Robux spent within developers’ games and 70% of Robux from gear on the Avatar marketplace, as of the company’s S-1 filing in November. (Last year, Roblox introduced “Premium payouts,” additional earnings developers get for effectively nudging players to subscribe by, for example, paywalling areas of the game. Roblox doesn’t specify a pay rate, which is calculated based on complex averages of user activity. But it says the payments are rising.) Plus game developers should anticipate setting aside time for moderation, updates, and DMCA takedown compliance, as well as pay taxes because these are “payments for the services you have provided.”

Roblox itself is a Robux dealer, working on a freemium model. Roblox says it makes “substantially all” of its revenue through the sale of Robux, through subscriptions and one-time Robux purchases, which “only a small portion” of users actually pay for.

Robux is pegged to the U.S. dollar, but because Robux isn’t regularly adjusted for foreign customers to account for exchange rates, a “rapid appreciation of the U.S. dollar against these foreign currencies can harm our reported results and cause the revenue derived from our foreign users to decrease,” the company wrote in SEC documents.

The rise of the ‘Earth economies’

Roblox is a virtual economy just like World of Warcraft, Second Life, EVE Online, Minecraft, and other online games. Virtual economies are mainstream at this point, but they make varying degrees of contact with what has been referred to as “Earth economies.”

In a phone call, Jon Callas, a computer security specialist and director of technology projects at the Electronic Frontier Foundation, used three categories to understand game economies. He compares a “closed economy” to a casino night amongst friends who might donate the pot to charity at the end of the night. The next tier is closer to a real casino, which allows you to buy tokens and cash out at any time. A third would be nearly parallel to a primary currency, which can be freely traded between users (legally or not) and the game system with exchange rates.

Roblox, he said, is closer to the final example. Another is the unauthorized version that developed from World of Warcraft’s in-game gold, which can be mined by users and has been (despite Blizzard Entertainment’s disapproval) traded on a secondary market. As one of numerous unintended results, the Chinese government reportedly exploited prison labor to farm WoW gold. Venezuelans have turned to multiplayer games for gold as the value of the bolivar plunged below the value of WoW gold.

That’s one place where income inequality inexorably seeps into in-game economies, and perhaps where Roblox shouldn’t be discounted as an income stream. “If you live where the median income per year is $300,” Callas said, “making ten bucks a day for playing video games sounds like a dream come true for a 19-year-old boy.”

This doesn’t make in-game virtual currency bad. Callas pointed to airline miles, which could be exchanged with a friend for a hotel room on vacation or the circulation of prepaid cell phone minutes as de facto currency in a developing nation.

Kids don’t have financial autonomy

Roblox is unique in that this is largely an economy of kids. By Roblox’s September 2020 metrics, 67% were under 13, and a full quarter were under 9.

Jessica Hammer, co-director of OH!Lab, a research center that focuses on the relationship between tech and play, said that younger kids might approach Roblox with an entrepreneurial spirit because they don’t have much (or any) offline money.

“You see even the younger players thinking strategically like this because they don’t really have a choice,” Hammer said in a phone call. “You can’t make purchases with Robux that you don’t have.”

Hammer notes that this introduces a secondary group of Roblox patrons who don’t much care about how many resources a hundred Robux will get. She calls this an “invisible stakeholder group” of parents or guardians.

“What they care about is how it translates into whatever it is they’re looking for from the child,” Hammer said. “If I need you to be able to entertain yourself for an hour while I make dinner, Roblox is really good for that.”

Roblox’s economy isn’t ultimately driven so much by kids’ decisions but real-world adult priorities. “The person who’s paying has to think that Robux are a good value,” she said. “And that’s where it gets interesting, since they’re not the one playing.”

Rolling in Robux riches

The most obvious place to look for a speculative market on Roblox is Roblox’s marketplace. Fortunately, famed trader Linkmon99 has documented his bootstrapping origin story on YouTube.

Linkmon99 (aka Tommy) is generally considered the “richest” Robloxian for wealth accumulated in in-game items. He started out with a modest 1,000 Robux purchased for $10, telling viewers that back then, Robux got you “a lot more bang for the buck.” As of this writing, according to the fan-created tracker Rolimon’s, his entire collection of limited items has a combined value of nearly 150 million Robux.

When Roblox released Limiteds—tradable and resellable “Limited Unique Items” created by Roblox—he jumped at the opportunity. He started buying and collecting items like a seagull hat, let them appreciate, and sold them for more. “I buy stuff, sell stuff, get stuff for cheap, repeat,” he says in one video, scrolling through years of his daily transaction history. He installed an automatic alert for new items so that he could get, for example, a Venomshank sword for 5,000 Robux, which octupled in value minutes after it sold out. In a few years, he was sitting on a small dragon’s hoard, counting the Sparkle Time Fedora, Ghostwalker, and the Purple Sparkle Time Fedora.

When Roblox introduced the player-to-player trading system in 2012, he mastered the art of bartering up for better value. In an email, Linkmon99 fondly recalled the free-for-all in forums and comments sections where users scrambled to collectively set market prices. “I made some very good trades right out of the gate because no one knew how to fairly trade,” he said. “Even though some items were clearly selling for more than others, users were trading them off for crazy bad or good deals.” He hung out in the forums, waited for desperate traders to overpay, and amassed his wealth.

These days, plundering is a little harder. Roblox disabled comments and forums, and trade websites were established as guides. Linkmon99 sounds as though he’s hung up his hat and pivoted to YouTube. “My item collection hasn’t really changed much since I don’t have any reason to sell them,” he said.

When Linkmon99 refers to himself as “richest,” he’s mostly speaking of chimerical wealth. Today, his collection of Limited items would be over $500,000, but he’ll never get the cash; Roblox now explicitly forbids users from cashing out on Roblox items not earned from games and creations.

“My plan wasn’t always to make money off Roblox,” he said. “When I first started collecting items on Roblox, I was solely doing it for the fun of getting the items themselves.” He’d been collecting for years before Roblox added the developer exchange program—“and even when it was first added, the sum of all my items on my account was probably only worth a couple thousand dollars (and no one, even the biggest game devs were making a living off roblox).” All in all, he says, he’s made about $100,000 from cashing out.

The sole certainty throughout the platform’s disruptions is that ever-more-valuable Roblox Limited items are the safest possible place to park your Robux. Linkmon99 believes that the market’s strength rests on three pillars. One, a scarcity of items that increases when users holding them quit or are banned. Two, the inflation created by an increased player base and Roblox’s success in selling more Robux. And three, online forums and Discord servers where “winning” trades earn cred. These success factors aren’t necessarily specific to Roblox, just a simple version of any speculative market.

The scarcity engine

The artificial scarcity Linkmon99 mentioned above is the engine that drives virtual economies. Jon Callas posited a programming bug that generates infinite heads of lettuce. “It’s just the way things are in artificial virtual economies,” he said. “A human mistake, like if I figured out how to wave my hands over a head of lettuce, and poof, I have two heads of lettuce—that totally destroys the lettuce economy because all anybody really needs is one leaf of lettuce.”

The idea is so central to virtual value that Vili Lehdonvirta and Edward Castronova open their book Virtual Economies: Design and Analysis with the thesis that there simply can not be an economy if everything is plentiful.

“A set of scarce resources together with processes like production, trade, and consumption that arise from people’s economic interactions is called an economy,” they write. In a world where everything is free, there is no need to make choices. “Because there is no need to choose, there is no need for economics,” they write.

When scarcity and economies inevitably seep into games, a crash is possible, and regulators are needed. This is why some games like EVE Online have hired economists as a de facto Federal Reserve. Second Life had to act as an emergency regulator when it shut down all in-game banks after players lost their savings, and a bank run led people to worry about the game’s economic stability. There have been debates about virtual property rights. One way to control scarcity of currency, and therefore prevent inflation, are gold sinks, mechanisms to destroy money through taxes or useless luxury items or property loss.

“In practice game operators need to be able to manage their economies and even close them down when they are no longer profitable, as happens from time to time,” Lehdonvirta wrote in an email. Operators try to make clear on their platforms that virtual possessions are “not tantamount to real ownership,” he said. “But users should still avoid keeping any assets in virtual form that they can’t afford to lose.” Real-world retail investors have probably heard that line a lot lately.

Roblox, after all, is an Earth company made by humans who exist in the same world of boring operational risks and global market forces. In its SEC filing, the company names credit card fraud among its challenges, as well as dollar appreciation and virtual currency regulations. Boo. Most prominently in its SEC filings, Roblox is aware that it could suffer the same fate as Neopets if it doesn’t retain the youth. Children don’t play Roblox, Roblox doesn’t sell as many Robux, and somebody’s stuck with a bunch of depreciated Robux. Earlier this month, the company warned that its user growth would slow to between 3 and 9% this spring—a drastic drop from its 85% user growth in 2020 amid gaming’s pandemic lockdown boom.

Ultimately, as Callas summed up the value of Robux, it’s “a low-impact way for kids to experience disappointment.” Speaking of disappointment, Roblox is currently estimated to open at somewhere between $45 and $70, and you can bid on it at whatever number you like!!!

Clarification: Roblox said in an updated version of its S-1 filing that its daily active users hit 37.1 million in December 2020. This post has been updated to reflect these more recent numbers, as well as additional details provided in the company’s February 2020 S-1 filing. We’ve also updated with more complete details about Linkmon99’s Limited Item collection and its value.

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