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Roblox, the Coming Ad Titan

Roblox held an investor in mid-November, and the two most compelling presentations, in terms of new information presented, were by Christina Wootton, VP of Brand Partnerships, and Kavita Kanetkar, who leads Economy Engineering.

If you’re not familiar with Roblox, here’s a primer we wrote back in June.

The only meaningful way Roblox monetizes right now is through user purchases of its in-game currency, Robux. As a player, I might spend Robux to play a game, purchase an avatar or some other in-game virtual good.

But those won’t be Roblox’s only monetization surfaces for long. Take a look at Roblox’s user base:

Users have more than doubled in just two years, and the fastest growing group is older than 13 years old:

Wherever eyeballs go, ads will follow.

In 2004, the year Facebook launched, one of its first advertisers was MasterCard. They were targeting a very focused demographic (college students) and trying to reach them early in their financial journey. The cost of customer acquisition, or CAC, was likely very low since there was little competition for ads on Facebook. The newsfeed didn’t even exist yet.

Here’s an excerpt from The Facebook Effect by David Kirkpatrick, from those early days when the company wasn’t called Meta or Facebook but “Thefacebook”:

“One of the first advertisers was MasterCard, seeking applications for a special credit card for college students. But like Y2M itself and most of its other advertisers, MasterCard executives were skeptical Thefacebook could really deliver results. So instead of simply paying to display ads, as it did with this campaign on other college sites, MasterCard agreed to pay only when a student filled out a card application. At this point, Thefacebook operated at about twelve schools. MasterCard turned on its campaign at 5:00 PM on a Thursday. Within one day it received twice the applicants it had expected for the entire four-month campaign period. Thefacebook was getting ads in front of exactly the right customers—wealthy undergrads at the best schools. MasterCard continued advertising.”

This type of advertising is known as direct response: a company will pay to get a specific action from a potential customer, usually an app install, a purchase, or in the example above, a filled-out credit card application.

The disruption we’ve seen in this year’s third quarter earnings for advertising networks is a result of Apple’s kneecapping of this capability; not the ability to show these ads, but rather the ability to measure and attribute their conversion. With the elimination of identifier for advertisers (IDFA), Apple reduced the ability to track the efficacy of ads, dramatically raising CAC.

From the WSJ:

“Loose-leaf tea seller Plum Deluxe used to gain a new customer for every $27 it spent on Facebook and Instagram ads. Then, Apple Inc. introduced a privacy change restricting how users are tracked on mobile devices. Now, the company spends as much as $270 to pick up a new customer.”

Companies will spend on CAC if the lifetime value of customers, or LTV, is much higher. For example, if it costs Plum Deluxe $27 to acquire a customer who will end up purchasing $500 of tea, and that tea has a 40 percent gross margin, the LTV might be close to $200. That’s a healthy LTV/CAC ratio of 7.4x. Clearly, if the cost to acquire a customer jumps to $270 per customer, Plum Deluxe no longer has a business.

The solution is to avoid Apple’s tracking change altogether and perform the entire chain of events—show the ad to the user and convert (i.e., sell the tea)—inside Facebook, rather than taking the user outside Facebook’s walled garden. This will give Facebook enough first-party data to train its advertising algorithms on targeting in a post-IDFA world, bringing CAC back down to earth.

The choice of words here—walled garden—is deliberate, because it brings us back to Roblox. It doesn’t have a sizeable ads business yet, but it will.

Right now, brands are still experimenting on Roblox, like MasterCard was on “Thefacebook” in 2004. Here’s how Wootton put it:

“Brands have been on the platform for many years. And when they first came on, they created virtual items or branded missions and scavenger hunts to integrate into existing experiences. At the time when I first joined the company, our teams were going out proactively pitching brands and educating them on Roblox and telling them why they should be on the platform. And many of them started to come on and they saw engagement numbers they've never seen before. And now we have so much demand. Everybody is reaching out how they can enter this space.”

Her entire segment is worth watching:

Wootton goes over a few case studies:

  • Gucci created a garden inside Roblox and in one month had 40 million visitors

  • Warner Bros promoted a movie, In the Heights, attracting 900,000 viewers in one day

  • Cartoon Network launched its Ben 10 experience and saw 160 million visits

  • Zag from Miraculous Ladybug had 250 million visits

  • Jailbreak had 5.4 billion visits

  • Nascar had 24 million visits in 10 days

These are remarkable numbers. Which is why Wootton had the best line of the entire investor day:

“In the next three to five years, every brand will have a Roblox strategy.”

These are examples of the other type of advertising—brand advertising—that seeks to imprint a brand in the user’s mind for later recall and consumption.

But why stop there? With commerce permeating every major social platform, the conversion can happen—and now, because of Apple, must happen—inside the app.

Consider the types of ads Roblox does have right now, from Kanetkar’s presentation:

“We currently have on-platform ads for developers to promote their experiences. So, this year, we rebuilt the whole system. We launched dedicated ranking on game discovery pages to improve the user experience. We saw that it did not just improve the user experience, but it improved ad conversion rates, 40% on desktop and 60% on mobile. We added targeting criteria like age, gender and platform.
We fixed reporting, we worked on it. Now we are able to track and attribute game play sessions to the sponsored ads. And what's in work is we will be working on launching world-class ad serving system and adding and optimizing more outcomes and more targeting criteria as we go.” (emphasis mine)

Did you catch that? The holy grail of advertising: tracking and attribution, closing the loop on advertising spend.

Here’s her entire segment:

But what might this do to those tens of millions of potential shoppers inside Gucci Garden or any of the other experiences from Wootton’s presentation?

David Baszucki, Roblox’s co-founder, drops the hint at the end: “So, Kavita, that was awesome. And I think we have many brands where we're starting to have that vision of when I'm already wearing that brand with one more click, having the physical version of that delivered.”

Kavita Kanetkar: “Exactly. We are at that inflection point. I think it's the right time.”

It’s the right time, the opportunity is huge—Roblox is on track to generate $0 per DAU in ad revenue this year, compared to over $55 per global DAU generated on Facebook (that’s globally; in North America, Facebook generates north of $230 per DAU in ad revenue)—and there’s a massive arbitrage to be had.

A developer asked this question in the Roblox dev forum:

Here's the going rate on most ad platforms:

These are broadly right. Here’s Matt Curtis, VP of Developer Relations, at RDC 2021 (the Roblox Developer Conference):

“But if you further want to expand your distribution there's always sponsored experiences. We continue to improve this we've added targeting, we've added scheduling, and I want to say that it's so affordable relative to other ad networks. In fact the average cost per click for a sponsored experience is between 2-3 Robux that's two to three cents. When you compare that to the leading ad networks, CPCs are generally in the $2-$3 range so this is 100x less than what you pay elsewhere and it allows you to scale your games in your experiences and ensures you have a healthy user base for anything you want to do.”

This is a huge cost delta, and it’s typical of nascent ad networks: there are lots of eyeballs on Roblox, but very little competition for ad bidding, just like “Thefacebook” back in 2004. This means it should also be a huge opportunity for marketers including companies like Plum Deluxe looking to acquire customers more cheaply than on Facebook.

Shopping in the metaverse

The first time I tried the Oculus Rift was in 2017 at Facebook’s headquarters in Palo Alto:

One of the first experiences I tried was grocery shopping.

I don’t remember the exact name of the experience but it’s just what you’d expect: a virtual supermarket where you could pick up items and toss them in a shopping cart.

Yes, it was totally skeuomorphic, but that’s the point: the sense of immersion and presence was incredible. Being able to “touch” and visually inspect the product felt real, and my immediate thought was, “shopping in VR will one day be huge.”

And this is with an early headset. The Quest 2 is more immersive than the Rift, and future headsets will only get lighter and offer higher resolution. What’s underrated is how much the brain fills in the blanks. Despite the screen-door effect and being connected to a PC with a cable, I still felt incredibly immersed.

Which reminds me of something Wootton said about Gucci Garden:

“And that's what's really important about these experiences is they're memorable. People feel if you speak to them, they say, ‘Oh, I've been to the Gucci garden.’ They feel like they've really been there. And in the first month of launch, September 1, they saw almost 40 million visits and a 94% rating, so our audience absolutely loved it.”

They feel like they’ve really been there.

And Roblox isn’t exactly high res. (Yes, the vision is to get there, eventually.) These experiences were consumed on mobile and desktop. Roblox has a build once, run anywhere philosophy, and Baszucki has said he’ll support VR in the future.

What happens when we all have VR headsets? The sense of immersion will be orders of magnitude greater. I’ll bet engagement goes up as well, which means conversion—clicking on those ads to close the loop on the purchase—will go up too.

If we squint, we have all the ingredients for a burgeoning ad network juggernaut:

  • A self-contained walled garden with first-party data and no IDFA concerns

  • A growing population of users and a flywheel of more developers leading to more experiences and more users

  • An incipient ad network with prices 100x cheaper than elsewhere, making it cheap to experiment

  • Demonstrated product/market fit: as Wootton said, “they saw engagement numbers they’ve never seen before, and now we have so much demand.”


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