New Platform Gold Rush

Betting on games in Roblox, UEFN, Telegram, Discord, and beyond

In the past year, a lot of attention has been paid to the opportunities that new platforms like Telegram and Discord have brought. These platforms have opened up for external developers to create content on them. Most developers have been scrambling to build games or gaming applications on these platforms in an effort to capture the gold rush early.

In the past, the early movers on new platforms could have captured a lot of "free" traffic. A lot of it. If you look at Facebook Canvas, which was sort of the first open platform to provide free traffic to developers, it opened up in 2007 and spawned big companies like Zynga, which are still around today.

These platforms have always started with a momentum of crazy growth, with users and developers coming in, until the platform reaches saturation. For mobile, the point came about ten years after the IAP possibility became a reality. However, the smartphone platform is more massive than the others; there is a tectonic shift in consumer electronics. It reinvented the computer in a size that fits in your pocket.

As saturation happens, the platform starts to struggle with growth. Their revenue share is depleted, so their agenda changes to maximizing what they can get from the developers through advertising revenues. This means there are no more free users for the developers. The same happened with Facebook, which is now happening with mobile, with their privacy policies affecting how you could affordably acquire users.

But there are different kinds of platforms. It's different for Roblox since they are a gaming destination. For the consumers and for the creative UGC creations that can make money there. Sure, when their growth stalls, they might be up to squeezing the developers for more revenues, but they have stayed out of being too heavily ad revenue-driven, which has historically caused the misalignment with the online platforms and developers.

Let's agree that Roblox is very much aligned with its developers. Roblox exists to have the best gaming content and the best developers building that content.

But what makes it hard for VCs to bet on Roblox studios? The same problems apply to all the current raved platforms, including Fortnite UEFN, Discord, Telegram, etc.

1) As a developer, you are inside this walled garden where you don't own the relationship with the customer. You could argue that the same problem exists on mobile, but that's false. First of all, you have the duopoly on mobile, where games exist on two massive semi-free platforms, iOS and Android. Second, you can collect much data about your users and create a feel for a seamless relationship. Mobile is closer to the browser, which is a totally free platform.

2) As a developer, your original IP will be associated with Roblox. If you have a hit game, it will be known as that Roblox game, which has advantages but clear disadvantages to go beyond the platform.

3) Once you find a hit game and want to launch it off the platform, you are betting on your team pulling off two incredibly hard things. First, you found product-market fit on Roblox, which is insanely hard. Then, you must keep that product-market fit while leaving the platform to build a presence elsewhere. Many have attempted this in previous times. Zynga blew up on Facebook Canvas in the early 2010s but never found PMF on mobile and had to buy all of its mobile gaming property.

So what about a company that has taken the portfolio approach of making several games on Roblox or one of the other platforms?

This kind of company would bet on a portfolio of hits and products that found PMF. I'd rather bet on a company that can predictably make one game, which isn't on one of these platforms where you really don't have the freedom to build a billion-dollar company with one game.

We've seen that the portfolio approach has also been challenging on mobile. It's extremely hard and expensive to launch a game and then spend five years tweaking it publicly to actually make it work, and these online platforms don't make it any easier.

Note that all of these strategies can work, and I believe the portfolio approach is good, but it's not something I feel can yield venture returns. It imitates the game publisher model, where you have spread your focus on several products over a more extended period of time. The mismatch is clear with VC, where you’d want the company to go from pre-seed, to seed and to Series A in a few years.

The final dilemma: who will buy these companies? The M&A for mobile studios was great since everyone realized that gaming IP on mobile could be massive, and the longevity of so many of the mobile hits was great. I'm not at all sure who'd want to buy a Roblox studio. Maybe a roll-up, but who then buys the roll-up?