The Metaverse Business Model
We wrote a piece titled Competitive Edge & Web 3.0, which laid out the Parent-Sub Framework we use to think of Metaverse/Web 3.0 businesses. This edition explores the idea through a real-life Metaverse/Web 2.0 example: Roblox Corporation.
The Parent-Sub Framework
At the Parent level: Commoditization at the Sub level is a necessary precursor to Scarcity value creation.
At the Sub level: Exit Barrier at the Sub level is a necessary precursor to Scarcity value creation.
Roblox Corporation (RBLX) develops and operates an online entertainment platform. The company offers Roblox Studio, a free toolset that allows developers and creators to build, publish, and operate 3D experiences, and other content; Roblox Client, an application that allows users to explore 3D digital world; Roblox Education for learning experiences; and Roblox Cloud, which provides services and infrastructure that power the human co-experience platform.
RBLX is a 2-sided Network Effect model, a Real business built out of monetizing the Virtual.
The value to RBLX’s Model as a ‘Parent’ emerges from the Long-Tail nature of the two sides of the Network Effect (‘Subs’).
- One side is comprised of Users (Sub level), who engage with the platform. To facilitate this engagement, Users have to buy RBLX’s own currency Robux using fiat currency. Users have to buy Robux at the rate of $0.01 per Robux (set at RBLX’s discretion). Latest year User figures: 45.5 MM DAU, who spent on average 2.5 hours daily on the RBLX platform. Out of this vast number, 678,000 are daily paying Users, who on average around 2 years as paying users on RBLX. RBLX latest year Revenue = $1.9 Bn.
- The other side is comprised of Developers/Creators (Sub level), who create Content for the platform. RBLX had 1.7 MM Developers/Creators. Out of this vast number of Content Creators, only 8,627 earned more than $1,000, 2,259 earned $10,000 or more, and just over 500 earned $100,000 or more in Robux.
What drives RBLX’s Scarcity Value?
(1) Commoditization at the Sub level
As Noise proliferates in a system (more Sub level), the value to Signal aggregators (Parent) increases exponentially.
The catalysts that drive Marketplace Centralization:
Low Adoption Friction: dumb down usage and you have an increase in adoption.
Low Transaction Friction: reduce transaction toll fee (could be in the form of actual cash paid, or reduced ‘thinking’ on the part of decision makers) and you have an increase in adoption.
More Commoditization at the Sub level, and you have an increase in adoption.
Low Adoption/Transaction Friction: User onboarding on RBLX platform is a frictionless process. It takes minutes for a user to sign up and begin engaging with the platform. Transaction — purchase of Robux — is frictionless as well.
More Commoditization at the Sub level: The Developer onboarding is frictionless as well, RBLX provides a developer suite that helps Creators hit the ground running and build Experiences.
These factors combine to strengthen the Scarcity Value of the Aggregator (RBLX) over time.
For a deeper understanding of the strength of this Scarcity Value, it is useful to look at the business from the eyes of the Developer/Creator.
How do Developers make money?
- Through Sale of virtual items in the RBLX Marketplace.
- Through Engagement-based Rewards program, that rewards Developers based on the number of hours spent in their experiences by Roblox Premium subscribers.
From Developers/Creators’ perspective, (1) and (2) puts the onus on User Engagement. Here is where RBLX’s Competitive Edge (Scarcity Value to the Parent) due to the long-tail nature at the Sub level (Commoditization) shines through.
Out of a Content Library of 29 MM Experiences, roughly 90% of Users’ Engagement is distributed across the Top 1,000 Experiences.
Out of 1.7 MM Content Creators, only 8,627 earned more than $1,000, 2,259 earned $10,000 or more, and just over 500 earned $100,000 or more in Robux.
The majority of Content is basically not truly remunerative to Creators.
For a Developer/Creator, breaking this ‘Discovery & Distribution’ ceiling is one of the biggest challenges.
This raises an important question: Why would a Developer want to be on the RBLX platform? A: RBLX’s value as an Aggregator of User Attention. It is very hard for the vast majority of Developers to build Discovery & Distribution, as they are unlikely attract the quantum of audience attention that RBLX offers them. This dynamic attracts Developers/Creators, and the more that proliferate, greater is the Scarcity Value to RBLX as a Discovery platform.
(2) RBLX Platform Stickiness
The second source of Scarcity Value for RBLX is through the creation of a Sticky Engagement Base.
This effect manifests through the Pricing lever: RBLX sets the value of the Robux-USD exchange rate at its sole discretion.
To engage with the platform, Users need to convert fiat currency to Robux at the rate of $0.01 per Robux. They cannot spend this Robux outside the RBLX platform, so are tied to the RBLX platform. Why would a User want to be on the RBLX platform? A: One-stop-shop for all things ‘Experiences’ — Gaming, Entertainment, Virtual Concerts, Virtual Meeting Rooms, Virtual Gatherings.
To further appreciate RBLX’s Platform Stickiness, it is useful to ask: who is the typical RBLX User? A: 84% of RBLX Users are under 25 years old; 64% are below 16 years old. For this audience, the real ‘customer’ is most likely the Parent. This ‘indirect’ customer is a rather sticky one.
On the Developers/Creators front, of the 1.7 MM, only 7,000 Developers/Creators are part of RBLX’s Developer Exchange Program, which allows them to convert their earned Robux into USD. To qualify for the Developer Exchange Program, Developers/Creators have to earn at least 100,000 Robux. To convert their earned Robux into USD, RBLX again sets the exchange rate @ $0.0035 per Robux; 1/3 of the rate offered to Users.
The vast majority of Developers/Creators (99.6%) do not qualify for the Developer Exchange Program. They are tied to the RBLX platform in the hope of monetizing their Robux in USD at ‘some point in the future’. The more this Creator base spends time on RBLX, greater is the Sunk Cost nudge.
(3) Own Language: Luau
From RBLX 10-K (bold emphasis added):
In addition to constructing 3D objects and environments, developers can script complex behaviors into their virtual experience with Roblox Luau. Based on Lua, an interpreted light-weight programming language popular in the gaming industry, Roblox Luau adds an optional static type system and a highly optimized interpreter that maximizes performance on Roblox Clients and in the Roblox Cloud. Using scripts, developers can modify the environment, control object behavior, and create new ways for users to interact with the virtual environment. Within Roblox Studio, developers have access to a powerful script editor which supports autocomplete, debugging, and the ability to emulate the Roblox Client running on supported devices.
The adoption learning curve of a language based on Lua, and ease of adoption for those conversant with Python, acts as an Entry/Exit Barrier.
Commoditization at the Sub levels + Own Currency + Own Language are potent drivers of Stickiness, and by extension, Scarcity Value for RBLX.
(4) Cost Structure
Even as revenues have grown 6x in 3 years, Infrastructure (data centers) and Sales & Marketing (user engagement) expense shares have fallen sharply. Falling S&M is one sign of strengthening Scarcity Value, as RBLX needs to apportion smaller shares of revenue to drive Engagement.
Increasing Scarcity Value is likely to manifest in the evolution of RBLX’s cost structure.
How will the cost structure evolve with time?
Over time, Cost of Revenue (primarily third-party Payment Processing fees) is likely to remain stable as a share of revenue. Infrastructure (primarily related to the operation of data centers and technical infrastructure), will likely fall as a share of revenue, as costs gets optimized.
The most interesting cost levers will likely be Developer Exchange Fees (amount earned by developers and creators on the Platform). For all the reasons covered above, rising commoditization at this Sub level will likely cause this expense to fall as a share of revenue. Concomitantly, S&M will likely fall and stay stable as well, mirroring the commoditization at the Users Sub level.
RBLX will have greater discretion over R&D and G&A. Depending on how the rest of the cost structure pan out, it will likely have leeway in setting these at optimal levels.
Conclusion
In summary, RBLX’s ramp so far indicates a strengthening competitive edge. Stickiness in the Network Effect is one of the most crucial sources of RBLX’s Scarcity Value today. However, will also be influenced by the competitive landscape. A drop in Stickiness in the Network Effect could cause both Developer Exchange Fees and S&M to rise sharply, reducing Scarcity Value.
At a broader level, the Metaverse landscape is here and the long arrow of evolution points to increasing traction. As RBLX (and others) lead this transition, aspects of Blockchain (to create true Immutable Scarcity of User Assets) are likely to become focal points of attention.
