Roblox is Already the Biggest Game In The World. Why Can't It Make a Profit (And How Can It)? — MatthewBall.co

🌈 Abstract

The article provides an in-depth analysis of the unprecedented growth and scale of the Roblox platform, as well as the challenges it faces in becoming a profitable business. It examines Roblox's user metrics, monetization, costs, and accounting practices, and discusses strategies the company could pursue to improve its profitability.

🙋 Q&A

[01] Growth, But Not Profits

1. What are some of the key factors contributing to Roblox's high costs and lack of profitability?

• Roblox has high costs due to:
  • App store fees (23% of revenue)
  • Payments to UGC developers (26% of revenue)
  • Infrastructure and Trust & Safety costs (28% of revenue)
  • Significant R&D investments (44% of revenue)
• Even with these high costs, Roblox generates strong operating cash flow due to its conservative revenue recognition practices and high stock-based compensation.

2. How does Roblox's revenue recognition policy impact its reported profitability?

• Roblox recognizes revenue over the average lifetime of a user (27 months currently), which results in a mismatch between when revenue is recognized and when costs are incurred.
• This compression of accounting profits occurs as long as user spending is growing, but Roblox generates strong operating cash flow.

3. What are some potential ways Roblox could improve its profitability?

• Reduce app store fees through regulatory changes or alternative payment methods
• Increase average bookings per daily active user, especially in higher-monetizing markets
• Grow advertising revenue to supplement user spending
• Leverage scale to reduce infrastructure and other fixed costs as a percentage of revenue over time

[02] Profit Light but Cash Heavy?

1. How does Roblox's accounting for stock-based compensation impact its reported profitability?

• Roblox's stock-based compensation, which accounts for 53% of total compensation, is a non-cash expense that allows the company to generate stronger operating cash flow.
• If stock-based compensation were normalized to around 10% of total compensation, Roblox's costs would increase from 114% of bookings to 135%, closer to the 138% reported under GAAP.

2. Why are Roblox's users in the United States and Canada more profitable than users in other regions?

• The average billings per daily active user (ABPDAU) in the US and Canada is over 4 times higher than in Europe, 6 times higher than Asia-Pacific, and 9 times higher than the rest of the world.
• This allows Roblox to achieve over 50% net income margins on its US and Canadian users, even after accounting for app store fees and developer payouts.

[03] How Does Roblox Get Profitable?

1. What are some of the strategies Roblox could pursue to improve its overall profitability?

• Reduce app store fees through regulatory changes or alternative payment methods
• Increase average bookings per daily active user, especially in higher-monetizing markets, by:
  • Continuing to grow its 13+ and 18+ user base
  • Introducing more premium content and experiences
  • Increasing user playtime and cultural cachet
• Grow advertising revenue to supplement user spending and reduce the impact of app store fees

2. How could Roblox's new advertising initiatives help improve its profitability?

• Roblox's new ad units, such as in-world billboards and immersive ads, allow it to generate revenue from non-paying users and reduce the impact of app store fees as a percentage of total revenue.
• Advertising also provides a way for Roblox to generate marginal revenue without incurring proportional increases in infrastructure and other fixed costs.

3. What other opportunities does Roblox's scale and user base present for future growth and profitability?

• Roblox is exploring expanding beyond gaming into areas like social communication, dating, corporate recruiting, and education, leveraging its large user base and platform capabilities.
• These new use cases could provide additional revenue streams and improve Roblox's overall profitability, though the company will need to carefully manage the costs associated with these initiatives.