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Kids prop up a $38 billion company 🕹️

You'll be forgiven, if you haven’t heard of Roblox till now. But now, you must know.

This is edition 242 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

Brands and consumers are trying to out-woke one another, but to what end? The stock market regulator wants forever-bonds, but not the finance ministry. Only one of them has investors’ interest in their minds. Heard of the $38 billion gaming platform called Roblox? We will lift the rock for you. 

Explaining Roblox: The virtual arcade for young gamers

Kids-focused gaming platform Roblox is the sensation everyone is talking about after the company saw its shares surge an astonishing 60% following its debut on the New York Stock Exchange (NYSE) last week. Roblox finished the week with a market cap of US$38 billion.

You may not know of it, but Roblox is insanely popular. 

Research suggests half of all US kids aged under 16 played Roblox in 2020. Yet, it remains little known outside the young gamers’ circle. That’s all likely to change now that it is a public company—and one that’s performing as it is.

The best way to think about Roblox is that it is a virtual gaming arcade centre that’s visited by over 30 million users every day. 

Kids open the app—which is closing in on 400 million downloads—and are greeted with a library of games. Like an arcade, they vary from shoot ‘em ups, to games of skill, and simulation titles that are like The Sims. But unlike an arcade machine—which requires engineering and software expertise to develop—Roblox outsources game development to its users. It offers simple game-making tools that even kids can, and do, use to build titles. 

That explains why there are officially more than 40 million games on Roblox. It’s an incredible number but, of course, there’s a lot of variation in quality and, as a starting point, the games are more social gaming titles than, say, hit titles that cost millions to produce.

But some games are incredibly sticky and, thanks to Roblox’s virtual currency that’s used to buy in-app items, they can be lucrative too. Advertising is also used to make revenue.

The developers behind hits have made life-changing sums of money, which includes helping parents pay off mortgages and more. Over 1,250 developers earned at least US$10,000 to date, with around 300 earning more than that. Roblox took home US$589 million in revenue in the first nine months of 2020.

Gaming portal

Roblox has been around since 2004 but it really took off in recent years as YouTube became a mecca for gaming and kids entertainment. During the initial Covid-19 outbreak, the company saw overall transactions through its app more than double year-on-year.

Anecdotally, my kids—aged 10 and 12—were introduced to Roblox when their favourite YouTubers began showcasing popular Roblox games like suspenseful horror title Murder Mystery 2, which has clocked more than 4 billion visits, social hangout game MeepCity (more than 9 billion visits), and Royale High, which has characters rushing around a magic school and has over 5 billion visits.

The beauty of Roblox is that it rides on the coattails of its best games—and there are plenty of gems in its library. It’s a self-fulfilling prophecy for developers, as games that get popular can become lucrative with the right type of monetisation. “Robux”—the virtual currency in Roblox—can be used across all games, which gives some comfort to parents buying coins that are in bundles as low as US$0.99.

Kids, for example, might download Roblox just to get access to one game. Role-playing game Arsenal, for example, has become an alternative to shooter titles like Fortnite or PUBG Mobile. It’s far more basic in terms of graphics and missions, but the highly-playable nature of the game has made it addictive. The game has been ‘favourited’ by over 2.5 million Roblox users and has more than one billion visits.

Arsenal embodies the appeal of Roblox games. By allowing anyone to develop games easily, Roblox games don’t have the same focus on aesthetics and graphics, but they do deliver on gameplay and social interactions. 

Arsenal is one of Roblox’s most popular games

But Roblox is up against a formidable challenge, the nature of adolescence.

The Roblox ‘graduates’

Kids’ tastes change as they grow up. That’s most acute when they enter teenage years and move into new activities and different types of games.

Gaming PC sales, for example, surged during Covid, while new consoles from Sony and Microsoft have entered the market. These options give young people whose first gaming experience came on Roblox the chance to upgrade to more graphically-rich and blockbuster games. 

It’s tricky to see how Roblox can expand its appeal without losing its core focus on being a kid-friendly friendly space—that’s a risk factor that it explicitly stated in its IPO documents.

There are plenty of avenues Roblox can explore to build on its already impressive position, including:

Hedge its reliance on Apple and Google’s app stores, which require it to pay a 30% commission on all in-app-purchases (IAPs)—that could mean putting more focus on the desktop experience or broadening to new gaming platforms. Perhaps even its own. (It ‘announced’ the Roblox Console as an April Fools’ prank in 2019, while a version of its app can be found on the Xbox One.)

A Roblox console might not be such a laughing matter after all…

Develop a focus on older games. These may be users who grew up on Roblox but now spend most of their time—and money—on more ‘grown-up’ gaming experiences. That could involve developing a new app altogether, with fresh branding and a different selection of titles, or developing in-house titles that focus on ‘graduated’ users.

If it can sustain its share price pop, that’ll provide acquisition options using stock to pay for deals.

Roblox has built a true gaming ecosystem for young internet users, and it’ll be fascinating to see how it performs now that the secret is well and truly out.

A bond is forever, says Sebi. Finance Ministry disagrees

Would you buy a bond that has no set maturity date, but pays you a steady interest forever? 

These kinds of bonds are known as perpetual bonds or perpetuals or even ‘perps’.

And, because of the uncertainty of what the future holds when something is ‘forever’, the yield (returns) demanded by investors is high. 

But why would companies that want to issue these bonds lock themselves in something that they would have to pay interest on forever?

Ok, they don’t quite lock themselves in; there’s a loophole. Of course. 

After a predetermined period, usually five to seven years, there’s an option where the company can call back (a call option) the bond and pay it off.

Banks were the common issuers of these bonds because it was a neat way for them to shore up capital to meet regulatory requirements. 

And some mutual funds had stuffed their portfolios with these perps. Because higher returns.

But, on Wednesday (10 March), India’s capital market regulator, the Securities and Exchange Board of India (Sebi), decided that some things had to change—for mutual funds. Because higher risk. 

It said that no mutual fund can have more than 10% of its portfolio in perps. And it said that perps have to be treated as a bond that’ll mature only in 100 years.

Why the change now?

2020 was the year of the pandemic but it was also the year in which risks emerged for debt mutual funds. Private sector lender Yes Bank failed and needed a bailout, and Franklin Templeton Mutual Fund shuttered six of its schemes.

Let me explain Yes Bank first.

When a company goes bankrupt, bond holders get paid out first when the company’s assets are sold off. They have seniority.

But when Yes Bank needed to be bailed out, investors learnt for the first time that perps didn’t quite have any seniority. In fact, they came last in the pecking order. Perps would get wiped out.

Yes Bank had issued Rs 8,450 crore (US$1.16 billion) of these perps. And mutual funds had lapped up close to Rs 2,700 crore (US$376.1 million) worth of it. Because returns

Now, they were stuck, and mutual fund managers weren’t too pleased. They likely didn’t “read the offer document carefully before investing”. 

So, Sebi wants a cap on how much risk mutual funds can take in perps. 

Then, there’s the bit about Franklin Templeton Mutual Fund.

Some of the bonds that FT invested in came with a sort of ‘call option’ or interest-reset. And the maturity of the bonds was calculated based on this date. Even though the actual maturity date was farther in the future.

So, certain mutual funds schemes that should’ve ideally had its portfolio of bonds maturing in six months were stuffed with bonds that would actually take longer to mature.

This meant that some of its funds were miscategorised. 

for ‘ultra short term funds’, the portfolio of bonds should have a duration (kind of like maturity) of less than six-months or 0.50 years. , Source: Moneycontrol

Get it?

Well, it’s a similar thing with perps.

Mutual funds are allowed to treat perps as a short-term bond based on the ‘call option’ for the purpose of calculating its maturity date. Even though perps are technically forever bonds.

Now, by treating perps as a 100-year bond, some mutual fund schemes will have to offload these bonds from their portfolio to maintain their maturity profile in the Sebi-mandated range. 

But wait. 

On Friday, news emerged that the Finance Ministry didn’t quite agree with Sebi and wanted a reversal of the 100-year maturity profile.


According to BloombergQuint (and the letter), mutual funds have subscribed to Rs 35,000 crore (US$4.8 billion) worth of these perps, out of the Rs 90,000 crore (US$12.38 billion) worth bonds issued by banks. 

The new rules would’ve pretty much meant that mutual funds wouldn’t be big buyers of the bank perps any more. And that’s a bit of the problem for banks because treating perps as a 100-year bond will change how it is valued and probably increase the borrowing cost for banks.

But isn’t investor interest what the government should actually be batting for?

“What is normal?”

This is exactly what Unilever seems to be asking, with its recent ban on the word ‘normal’ from its packaging and advertising. It will take the word off all beauty and personal care brands—which is 200 products, and no mean operational feat—after its study revealed that seven in 10 people agreed that its use on products had a negative impact.

The global FMCG giant, which houses brands like Dove and 63 others in India, accompanied the move with a video about its Positive Beauty programme. It leaves one wondering what the creatives casting for it might have asked each other: “Dear colleagues, what are all the opposite-to-normal types of people we can think of, so that we can put them in a video about how normal it is to be them?” Nudge nudge, wink wink.

Perhaps anticipating questions like this and “What is Positive Beauty even?”, the president of Beauty & Personal Care for Unilever included this in the press release: “We know that removing ‘normal’ from our products and packaging will not fix the problem alone, but it is an important step forward. It’s just one of a number of actions we are taking as part of our Positive Beauty vision, which aims not only to do less harm, but more good for both people and the planet.”

Unilever has had to apologise in the past, with Dove running into multiple controversies about racism despite, arguably, intending to appeal to egalitarian aesthetic values. Companies have accustomed themselves to the extremely tight feedback loop that the digital age presents, and it is debatable if this is really for the better.

For example, jewellery brand Tanishq abashedly pulled down an ad after it was called “anti-Hindu” on social media, all for portraying a Muslim family throwing their Hindu daughter-in-law a baby shower. Online fashion retailer Myntra’s recent logo change, sparked by boy room talk about it, was also immediate.

While brands have been quick to take a stance, they are also alert to it being ripped apart for not being genuine—which is increasingly difficult to come across as. Purpose-driven advertising, where a brand associates itself with a cause much larger than the functional problem it solves, has risen along with causes themselves. Indeed, we’ve been in a world where having values, and vehemently voicing them on social media, have become markers of personality. And since brands have always been a means of self-expression, a way for individuals to become who they want by proxy, businesses have been discerning in choosing the appropriate cause for their audiences.

Among India’s earliest and most successful examples is Ariel’s ‘Share the Load’ campaign, launched in 2016, which sparked millions of conversations on why laundry, and household chores, should not only be the woman’s domain in India. It continues to find new contextual positions, even as the brand, our times and culture evolve. 

On the other hand, there are the likes of Pornhub, whose bizarre film called ‘The Dirtiest Porn Ever’ questioned the state of beaches littered with plastic. (“We’re dirty here at Pornhub, but that doesn’t mean our beaches need to be,” the company’s vice president helpfully explained.)

Perhaps the most fitting example now, for purpose forced by cultural change, is that of Axe, a Unilever deodorant brand. The same company that owns Dove, which talks about real beauty and championing women, first positioned Axe to appeal to an almost offensively teenage lad culture, and “getting the girl” (originally intended ironically, until it became what it was exaggerating). But after research done in 2015 revealed that men felt overwhelming pressure to conform to masculine stereotypes, it pivoted from advocating scent as the ultimate means to confidence and hyper-sexuality, to asking men to “Find Your Magic”—which is as broad a position you can straddle without losing balance.

Positioning has been likened to finding a seat on a crowded bus, which explains why it is such an onerous task these days, when everybody—from brands to people and their uncles—is on the proverbial social/digital bus, shouting and playing their own version of antakshari (a popular spoken parlor game in India).

Unilever may have learnt the hard way that even its huge, well-intentioned efforts are perhaps best served with a disclaimer that dulls itself.

TL;DR: Consumers became woke, so brands became woke, only for consumers to become woke about brands being woke, and for brands to become woke about consumers being woke about brands being woke.

That’s a wrap for today.

Don’t forget to write in with your thoughts and observations on how this pandemic is reshaping businesses, societies, and economies. We will be back tomorrow.

Stay safe,
[email protected]

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