RBLX - SaltLight Capital - Roblox: A Company With The Potential To 'Matter'

Summary

• Today, we would like to discuss one of our early-stage investments, Roblox.
• We see Roblox as a company with the potential to ‘matter’.
• Despite potential scepticism, we firmly believe in the potential of Roblox as a promising investment opportunity.
• We hypothesise that the high level of interactivity offered by 3D real-time technology will result in higher advertising rates compared to traditional search advertising.
• Although the younger user base of Roblox presents potential risks, RBLX's improving engagement metrics, expanding non-US user base, and maturing portfolio give us a reason for optimism.

The following segment was excerpted from this fund letter .

Roblox ( RBLX )

Today, we would like to discuss one of our early-stage investments, Roblox. While there is a risk that we may be premature, mistaken, or even wrong in our evaluation of this opportunity, we see Roblox as a company with the potential to ‘matter’.

Roblox is a 3D real-time content platform that bridges consumers and creators ^[1] . Instead of being a conventional gaming product, Roblox acts as a tool provider that democratises the creation of 3D real-time user-generated content ( UGC ).

What exactly is ‘3D real time’ and what is user-generated content?

The term 3D real-time content may seem complex, but it simply refers to a three-dimensional digital environment that is dynamically rendered in real-time. To put it in perspective, 2D images and videos are limited, static representations of an event captured in 2D. They lack context and physical properties ^[2] . On the other hand, 3D objects in the Roblox world have context and properties ^[3] that allow for interactive experiences that mimic the real world. These objects are generated in real-time through programming code.

Think of it as the difference between a scanned PDF image and an editable Microsoft Word document. The scanned image is passive and cannot be edited, while the Word document is editable and has font and style properties.

Real-time content involves more human actions and senses, making it a more memorable and higher-order experience compared to passive forms of media such as photos and videos.

User Generated Content ( UGC )

The entertainment industry operates on a fundamental principle of exchange between the consumer and the content creator. The consumer provides their attention in return for engaging content, and the content provider monetises this interaction through advertising or other means.

Unlike traditional content creators, Roblox does not produce content but instead provides the tools for creators to do so. This has several benefits, including having a broader and more diverse range of content and not having to invest in potentially unsuccessful content.

Roblox’s combination of 3D real-time and user-generated content offers a much more dynamic and interactive experience than other content mediums today, making it a strong contender in the competition for attention.

A Sci-Fi Investment Thesis?

Despite potential scepticism, we firmly believe in the potential of Roblox as a promising investment opportunity. The platform already boasts a substantial user base, with an estimated 250 million monthly active users from the Gen Z and Millennial generations and nearly half of all children in the US are believed to be active on the platform.

Additionally, data shows strong daily engagement with the average daily active user spending 2-3 hours on the platform, which is comparable to the TV viewing habits of previous generations.

This is evidenced by Roblox’s recognition as the top Breakout Gaming app based on hours spent, according to Data.ai ’s State of Mobile 2023 report ^[4] . These facts provide compelling evidence that the 3D real time UGC world that we envision is already here and thriving among future consumers.

Figure 3 – Data.ai State of Mobile 2023 Report

The Promising Prospects of Roblox

When you log onto Roblox today, you’ll likely encounter a range of games presented by their discovery engine to capture attention and generate high levels of engagement. As we’ve noted, engagement equals monetisation potential, and we believe that 3D real-time content will serve as a foundation for high-value advertising. However, we also anticipate that advancements in AI-generated content technology could significantly enhance Roblox’s ability to democratise the creation of 3D real-time content.

High-Value Advertising

Thanks to its unique user demographic, Roblox is attracting top consumer brands who are exploring 3D real-time engagement. Through our research, we’ve found that this platform presents a remarkable advertising medium. It’s unlikely that we’ll remember a standard search ad while searching for shoes, but the experience of skating through a Vans World on Roblox will surely stay with us.

When comparing the experience of this conventional Instagram content video of skateboarders to the immersive Vans experience on the Roblox platform , the latter stands out as a more interactive and memorable advertising medium. Users can design their own Vans shoes and purchase them digitally for use in other Roblox games creating a lasting connection with the brand.

Figure 4 – Vans World Experience in Roblox

Figure 5 – Vans Instagram Video

While the comparison of visits to followers may not be exact, the Vans experience on Roblox has demonstrated significant success

The Vans Roblox experience has generated 90m visits, demonstrating the power of immersive brand experiences. In our research, we probably spent 10 mins playing around with the experience over a year ago and if we were generous, we could speculate that Vans spent, at most, $2m to hire a developer to create the experience (calculating to a ‘cost per click’ basis of $0.02c per ‘click’) to get ten minutes of our time.

A year later, we still recall the experience, while typical footwear ads are easily forgettable with an average cost per click of $0.29 and a cost per thousand impressions of $5.80 ^[5] .

The Vans Roblox experience shows the impact that engaging, memorable experiences can have compared to traditional advertising methods.

We hypothesise that the high level of interactivity offered by 3D real-time technology will result in higher advertising rates compared to traditional search advertising. This has the potential to become a lucrative revenue stream for Roblox in the medium term.

Enabling Creativity Through Generative AI

The skill gap between taking a photo (or video) and creating an interactive experience can be significant. However, the Roblox user base has played a meaningful role in teaching a new generation of young creators how to code, using their version of the Luau programming language ^[6] . This has the potential to create a strong and lasting developer ecosystem which can act as a strong moat from competitor platforms.

It typically takes a decade for a coding language to become established and widely adopted, but it is incredible to observe these young creators spend countless hours creating tutorials for their peers.

In recent years, generative AI has gained widespread attention, with stable diffusion models offering a simple way to convert text into images. Additionally, the advent of interactive chat mediums powered by large language models, such as ChatGPT, has opened new possibilities for less technical creators.

Below is an image that we created with the following text: “Skateboarder with Vans shoes in beach park” on Midjourney.

Figure 6 – Midjourney

The next big breakthrough in technology will likely come from the rapidly growing field of text-to-3D AI models. The success of image-to-text models can be traced back to the widespread use of ‘alt’ tags in HTML code, which provide a text description for images.

However, a similar corpus of labelled 3D models is currently not available at scale, as the models used in games and other applications are typically locked in executable code. Roblox, with its large user base and a vast collection of UGC 3D objects, has the potential to be a major player in this field by investing in generative AI technology. This would allow any user to create 3D experiences with ease, similar to creating stable diffusion art, and unlock a new realm of 3D content creation while reducing the complexity of coding.

In the past year, Roblox has made significant investments to enhance the realism of its engine, including advancements in materials, spatial audio, and layered clothing. These improvements are aimed at attracting an older demographic (17-24 year olds) and creators who can produce experiences for this age group. Although the younger user base of Roblox presents potential risks, such as a potential shift to another platform or the attraction of undesirable experiences, the company’s improving engagement metrics, expanding non-US user base, and maturing portfolio give us a reason for optimism.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

For further details see: