Image Credit: Warner Bros.

I’m on book number five of 2021.

It is “Ready Player Two” by Ernest Cline. Link

I enjoyed the first book “Ready Player One.” Link

But I was disappointed by the film, direct by Steven Spielberg. Link

The book sequel was released last November, and the publisher partnered with Roblox ($RBLX) to serve as a comparable immersive virtual universe:

To promote the sequel to Ready Player One — a book about a treasure hunt inside a virtual universe — author Ernest Cline has partnered with the hit kids game Roblox to re-create something akin to the plot of the original novel: a hunt for clues and prizes inside a virtual world.

Roblox says the treasure hunt will take place across seven different game worlds. The first world is already open, but it sounds like the event really kicks off on December 1st when a Q&A with Cline and Roblox CEO Dave Baszucki will air inside the game. Players will be “awarded virtual goods” specific to the Ready Player Two event for completing the treasure hunt. Link

The current version of Roblox is still nowhere close to the reality of the OASIS, which stands for Ontologically Anthropocentric Sensory Immersive Simulation.

But everyone is expecting a metaverse to emerge that combines the Internet, virtual reality, and augmented reality, and Roblox is an early contender:

It’s important to clarify that Roblox isn’t a game. It’s a game-creation platform. Roblox has never published a single game; rather, its users create games using Lego-like building blocks in Roblox Studio.

Chris Misner, head of Roblox International, puts it this way: “We’re not a game; we’re a platform for creativity and play. We provide tools and support for people to build what their imagination wants. The only limit is their imagination. Link

There are hurdles to creating this globally networked virtual reality world:

In this respect, one of the biggest challenges with building the Metaverse is figuring out how to create enough high-quality content to sustain it. It would take a tremendous amount of content to populate the intricate worlds shown in Ready Player One’s OASIS. It would also be staggeringly expensive to create via professional development. The MMO Star Wars: The Old Republic famously cost EA ($EA) more than $200 million to make and required a team of over 800 people working for six years to simulate just a few worlds within the Star Wars universe. In comparison, a true Metaverse would likely be composed of several galaxies of Star Wars-sized virtual worlds.

User-generated content offers a promising solution for cost-effectively scaling content production. Platforms such as YouTube ($GOOGL) and Twitch ($AMZN) have assembled vast content libraries faster and more efficiently than any professional studio. YouTube serves over 1 billion hours of video daily via a community of 31 million channel creators. Twitch’s 6 million creators live-streamed over 10 billion hours of video in 2019. These platforms harness the collective creative energy of their communities to create an endless flywheel of content.

Yet UGC platforms have their own challenges, as well. Maintaining a high quality bar can be difficult, given the sheer volume of content being created. And due to the need for users to learn new tools and programming skills, content creators tend to be vastly outnumbered by consumers. YouTube’s 31 million creators represent only 1.2 percent of its 2 billion monthly user base. 3D game engines such as Unity ($U) and Unreal are powerful, but can be difficult to learn. Unity, for example, is used by only 1.5 million monthly creators today, a fraction of the 2.7 billion gamers worldwide.

UGC created by a small segment of human creators, while a meaningful step forward from professionally-created studio content, is likely only one side of the coin that we need to build the Metaverse and its new social systems. Link

For now, Roblox is still hugely popular:

Roblox commands the attention of America’s kids to the tune of 2.6 hours per day. And it does so with games that largely avoid the violence and dystopia of those $100 million blockbusters. Some of the most popular games on the Roblox platform are about adopting digital pets, building virtual communities, and running a pizza restaurant. The audience skews younger than the traditional video game market as well: 54% of users are under 13.

Unlike Facebook, whose concern for the well-being of kids lies somewhere between Michael Jackson and the Catholic Church (can’t wait for the hate mail on that one), Roblox appears to be run by people who act as if they have children of their own. The word safety appears 121 times in the S1, which is 8x more than in Facebook’s ($FB). And the word “parental appears six times in Roblox’s S1 and… zero times in Facebook’s. The company employs both filtering software and content moderators, who have reviewed over 68 million digital assets this year alone.

By dispersing tools to millions, Roblox has made money for independent developers and created a flywheel for its own future growth. Nearly 1 million creators earned Roblox’s in-game currency (“Robux”) with their creations, and over a thousand have made over 10,000 real dollars in the past 12 months. 250 of its creators made over $100,000. Link

But there are financial disadvantages:

Consider the illustrative $100 in iOS Roblox revenue (an estimated 75–80% of all revenues). $30 goes to Apple ($AAPL) off the top, while $31 is consumed by Roblox’s core infrastructure and safety costs, and another $11 is taken up by overhead. This leaves a total of $28 in pre-tax gross margin dollars for Roblox to reinvest in its platform. This reinvestment spans three categories: research and development (which makes the platform better for users and developers), user acquisition (which grows network effects, value for the individual player, and revenues for developers), and developer payments (which leads to the creation of better games on Roblox). Today, Roblox reinvests 23% of revenues in R&D, 7% on sales and marketing, and the aforementioned 24.5% on developer payments. As a result, it currently operates at a roughly -25% margin.

Roblox has doubtlessly enriched the digital world and led to hundreds of thousands of new digital creators. But for every $100 it creates, it loses $25, developers collect $24.5 in net revenue (i.e. before all of their development costs), and Apple collects roughly $30 in pure profits despite putting nothing at risk. The only way for Roblox to increase developer revenues today is to deepen its losses or halt its R&D, which would in turn harm both Roblox and its developers over the long-term.

Roblox’s economics should improve with scale. Overhead, sales and marketing should grow more slowly than revenues. However, this would unlock only a few percentage points to cover significant losses or marginally increase developer revenue shares. R&D should offer some scale-related margin improvements, too, but fast-growing companies shouldn’t be achieving profitability through R&D operating leverage. The company’s two largest costs, which comprise roughly 61% of revenues, are essentially fixed. Infrastructure, which largely scales with usage and will become more expensive as the platforms expands its concurrency capacity and expands into VR. And Roblox doesn’t control store fees; that’s exclusively up to the platform. Link

Still, navigating in this new world present new possibilities as Roblox’s Global Head of Music, Jon Vlassopulos, imagines:

The concert market is going to get a lot bigger and more exciting for fans moving forward. Remember, most concerts are 18+ or 21+, and we have a large community of users under 18, so everything we do is additive. We are helping many of our kids and teens experience a concert for the first time — and no one forgets their first show!

It’s all very exciting. And as the Metaverse expands, we’ll see new forms of entertainment emerge; new Metaverse artists will be able to launch careers virtually without ever having to play a real-world show.

I think it is important to note that we are right at the beginning of a massive new industry. We are just scratching the surface with shows like our Lil Nas X concert. I have been through the birth of the internet in the ’90s and the impact it had on the music industry, then we have had mobile for the last 20 years. I believe the Metaverse has the potential to be bigger than all of them.

Artists, labels, publishers, venue and festival owners, video platforms, etc., all have a chance to reinvent themselves and capture first-mover advantage on platforms like ours. For 2021, we are looking to work with forward-thinking partners who can help us create some amazing case-study experiences that others in the industry can learn from and follow. We look forward to a future where kids can reconnect with music at a very core level, and artists are able to express themselves fully beyond what they can do on streaming platforms. Along with all of this innovation will come new and lucrative new revenue opportunities. Link

The direct listing date of Roblox shares is to be determined.

Each Roblox share will cost more than a quarter.

It might be worth playing.

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