Summary
- Ads are one of Roblox’ unpulled levers. They're pulling it.
- This will be a new type of ad with a new level of brand engagement, and a great demo.
- But advertisers will not be getting the sort of data on users as they have become accustomed to in digital ads. That’s Roblox’ uphill battle.
- I expect this to be a slow grower.
- I remain bullish long term.
Roblox Dips Into Ads
Roblox ( RBLX ) had their annual developers conference a couple of weeks ago. These are getting much larger every year. This is where they roll out new technologies for game developers. Last year's presentation was particularly jam-packed with advances in spatial audio, backend cloud development and new avatars.
This year one reveal stole the show: In-game ads are finally coming to Roblox. Roblox gets substantially all its revenue from sales of virtual in-game goods, and I have long described advertising as one of their unpulled levers. So it looks like they will be pulling that lever. They're showing advertisers the technology now, and ads will be rolling out next year.
So why is this exciting? Roblox is very Apple-like ( AAPL ) in its approach to new things. They spend a lot of time working on something before it sees the light of day, and even then, they roll it our slowly, and with care. Voice chat is a great example. Many multiplayer online games have had this feature for a long time, but Roblox waited until last year. Why?
- First, they wanted to get implementation right. Their first principle is always to mimic real-world dynamics, so in their implementation, you can hear other avatars that are close to you in the virtual world, but not ones farther away. They also wanted to make sure they could moderate, which is much harder than with text chat.
- Second, they began with the top 1,000 developers, and let them integrate it into their work.
- Then, at last year at the developers conference, they opened it up to all the developers and all the games.
- It's only available to players who verify their age as being over 12. About 55% of users are 13+ now. The Roblox generation is aging up.
Most gaming companies think about audio chat for about 15 minutes, grab some open source code, or existing commercial option, integrate it into their game, and move on. Similarly, with ads, most companies integrate some existing network that throws virtual billboards around a game world. The result is much the same as you see on the web: Ugly display ads that detract from the experience.
So unsurprisingly, Roblox has been working on something different for years, which they call portals. These are basically branded mini-games, like the Vans World Skate Park ( YouTube video link ).
There have been a few others of these from Warner Brothers ( WBD ), Nike ( NKE ) and Gucci ( OTCPK:PPRUF ) as well. Fashion companies seem to be the most interested because of the avatar tie-in, and the chance to sell digital goods as well as advertise real world goods. You can watch the video I linked to above, but the vlogger expends a lot of energy trying to make fun of Vans World, but can't deny that he is having a ton of fun in the skate game, and is spending in-game currency there.
This is an ad that people willingly go to, where they spend time and money. It adds to the experience; it does not detract. This is an entirely new category of advertising geared towards a generation that is 100% cynical toward advertising.
In the past, these were standalone "events" and there were very few of them. Like with spatial audio, Roblox first wanted to work out the kinks and see how it worked with a few tests before they rolled it out widely.
Soon, game developers will be able to put billboard portals in their game, and they get a cut of the revenue. There also will be much simpler interactive billboards that don't whisk players to a new world, and these look like digital goods storefronts. All the ads will be interactive in some way, but it sounds like Roblox is pushing big brands to the portals concept.
And again, 13+ only. No ads for kids.
The next step after this is product placement for digital objects in games, like a Spaulding basketball in a basketball game.
Will This Work?
Roblox is Apple-like in another respect: They do not collect a lot of data on their users, and restrict themselves in many ways. Years ago, Steve Jobs hated the ugly display ads that were (in his opinion) marring iPhone, and Apple developed the iAd network with the idea that the ads would be prettier, more interactive using HTML5, and much more privacy-respecting than the data broker free-for-all that was developing.
But that last part also led to its failure. Advertisers like all that user data and directly targeting individuals. There will be none of that on Roblox, by design. It also will be expensive to build these portals, like national 30-second ads. So what do advertisers get?
Number one is the demo: Teenagers globally. It's a pretty well-established principle in advertising that by the time people get to their 30s, their lifelong brand preferences for many things are already baked in, and it's much harder to influence them. Nike and Vans make a lot of sense for the Roblox demo, but why Gucci? Gucci is investing in their future customers. They want teenagers to think of Gucci as the height of luxury, and show off their virtual Gucci swag to friends.
The second thing is a big advertiser buzzword: Brand engagement. What that means is people spending time thinking about the brand. Google "Apple" and see how much time people spend thinking about that brand; it's pretty exhaustive and exhausting. This is easy to say in pitch decks - "We need better brand engagement" - but hard to get in the real world.
This is an incredible amount of engagement. If you watch that video I embedded above, the vlogger is there for the skate park, but spends an awful lot of time talking about Vans.
So let's try and think of this in context. You're in a role-playing game, slaying orcs, naturally. After you vanquish a party and enter their lair to collect their treasure, there is an ad for HBO Max' House of Dragons.
Your party enters the portal, and you're in a new game, riding dragons and burning up invading armies, or whatever dragons do. Then, when you are done with what amounts to a mini-game within your game, you hop back to where you were, and vanquish some more orcs.
That is an unmatched level of brand engagement for an ad. I think the agencies will be wildly enthusiastic, but will their clients? It remains to be seen. Their digital departments are used to knowing everything about who sees their ads, and this is more of a black box.
Roblox Stock
The near-term effects on revenue will be minimal in my opinion. Roblox' hallmark is they announce something, make slow progress, and then five years later you look back and go "Wow!" Right now they're still struggling with the post-pandemic gaming environment, where they packed several years of growth into a few quarters, and they're now catching up.
But engagement is still good, and they're maintaining all those new users acquired in the pandemic.
This is one of their unpulled levers, so what we really want to see is these revenue conversion metrics rising back up to those pandemic levels:
Excluding the seasonal surge in the December 2021 quarter, that's a pretty straight line down in 2021-2022. We also want to see this line creeping up more:
Keep in mind that is the normal summer seasonal surge in the September 2022 estimate. I estimate in the September quarter, Roblox users are still, on average, spending 23 more minutes a day in the app than they were in the September 2019 quarter, but these engaging mini-game ads may send that up.
I'm waiting for market conditions to improve, but I remain bullish on Roblox' long-term prospects.
- Of anyone, they have the clearest vision of what they are building. At this early stage of metaverse, that's the most important part.
- They understand they are on a very long road and have time to get things right before rolling them out. Facebook ( META ) clearly does not understand this, and keeps releasing unfinished software for their metaverse pivot.
- They lack hardware and are pretty dependent on Apple and others pushing this along, but otherwise bring a complete metaverse package with user platform, developer platform, monetization and backend cloud.
For further details see:
Roblox: A New Kind Of Ad