Tae Kim

Video Game Companies Should Think Twice about NFTs

The video game industry is at a crossroads. Enticed by the prospect of easy profits, game publishers and even a retailer like GameStop Corp. are embracing the opportunity provided by the hottest buzzword of the moment: blockchain-enabled non-fungible tokens, or NFTs. But they should reconsider.

Frustrated by sluggish sales of popular titles, game makers are on the hunt for other revenue sources. Yet any gains come with a real risk of alienating their customers, many of whom view sales of virtual goods as an intrusion on the gaming experience.

NFTs are unique collectibles stored on a blockchain that are associated with a digital asset such as images or videos. The virtual goods often come with little or no usage rights. But that hasn’t stopped the speculative frenzy over buying and selling the items.

GameStop, for example, has been working on an NFT platform that will allow creators and publishers to list gaming-related items such as outfits and weapons. On Thursday, the Wall Street Journal reported the retailer had hired more than 20 employees for the project and plans to launch its marketplace later this year. GameStop last year was among a handful of companies caught up in the meme-stock trading mania that sent its shares soaring.

Some leading gaming executives and companies have raised concerns about the frothy nature of NFTs. In October, Valve banned any software that issues or allows NFTs on its popular PC game store. Epic Games Inc. Chief Executive Officer Tim Sweeney has said the NFT space is filled with scams, while Microsoft Corp.’s head of Xbox, Phil Spencer, told Axios some NFT gaming efforts are “exploitive.”

Their warnings haven’t stopped a wave of NFT initiatives among other gaming companies. In November, Electronic Arts Inc. management told analysts that NFTs and play-to-earn, where gamers earn money through play time, would be an important part of the industry’s future. Last month, Ubisoft Entertainment, the game maker behind hit titles such as Assassin’s Creed, unveiled a handful of NFTs for digital items in one of its older titles. Developer GSC Game World said its next S.T.A.L.K.E.R. release would contain NFTs only to cancel the plans the next day after pushback from gamers.

NFT enthusiasts say the virtual marketplaces foster vibrant communities around games and offer a financial incentive to play longer. In addition, they contend, the technology will some day allow players to use digital gaming items across different titles.

But those advantages will come at a cost for game brands. Devoted gamers tend to be passionate about the design and experience of games. Introducing money-making mechanics inside games will alter how players behave, potentially driving away core users. That’s why video game giant Activision Blizzard Inc. has long banned so-called gold farmers, players who join games solely to acquire in-game currency, inside “World of Warcraft.”

Game companies adopting NFTs are also overestimating the potential for moving virtual goods among different games. Most big-budget titles use specialized software that doesn’t translate across companies. In other words, you can’t just take a horse from Rockstar Games’ Red Dead Redemption 2 and expect it to easily be transferred to ride in Assassin’s Creed. It would require a lot of extra customized code to work, something unlikely to happen between competing publishers.

But perhaps the most important reason that game companies might want to steer clear of NFTs is that they would be fueling a speculative frenzy. Once the NFT bubble bursts, as it inevitably will, some gamers will be left holding worthless assets.

It’s already happening in other markets. For instance, the value of many NBA Top Shot NFTs has fallen more than 95% in just a few months now that the initial excitement has faded. It shouldn’t have been a surprise that 35,000 NFT copies of a random layup video wasn’t the wisest investment, but some consumers were swept up in the hype.

The backlash against video game companies could be fierce if players similarly wind up losing a lot of money trading NFTs. Even those without financial skin in the game will be dismayed. If a game become less entertaining, consumers might just decide to stop playing.