Mall video game companies have launched non-fungible token (NFT) projects in the past year. Ubisoft (OTC: UBSFF) published NFTs for Ghost Recon: Breakpoint, Konami (OTC: KNAMF) auctioned NFTs for his classic Castlevania series, and Square-Enix (OTC: SQNNY) sold its biggest western developers, including the creators of grave robber and Deus Ex — to finance the development of new blockchain and NFT projects.

But will NFT projects generate meaningful revenue for game companies? Let’s review the potential benefits and the pitfalls.

How do NFTs work?

NFTs, like cryptocurrencies, are minted on a decentralized ledger called the blockchain. But unlike cryptocurrencies, they are not “fungible” or equivalent to each other. For example, a single Bitcoin can be directly exchanged for another Bitcoin as they have the same inherent value. NFTs cannot be traded this way because they contain data related to a digital asset like an image, video, or song.

Image source: Getty Images.

Simply put, NFTs are digital journals that allow a person to own the underlying digital asset. Digital artists can mint their artwork as NFT tokens – which represent “originals”, as opposed to “copies” that can be downloaded online – or they can use algorithms to randomly generate digital artwork. unique digital art with a wide range of features.

Critics claim that NFTs are inherently worthless because they are simply links to digitally copied assets. However, NFT evangelists believe it’s the rarity of these links that gives them value – similar to physical collectibles like paintings, baseball cards, coins and tapes. drawn are valued.

Why do video game companies want to sell NFTs?

It’s easy to see why video game companies would want to sell NFTs. In-game item sales, which are used to monetize most modern games, have already trained gamers to embrace the concept of digital ownership.

At the same time, high-end “triple A” video games have become more expensive to produce over the past decade. The original from Ubisoft Assassin’s Creed (2007) reportedly cost $20 million to develop, but the company reportedly spent $100 million to Assassin’s Creed IV: Black Flag (2013). Square Enix reportedly spent $60 million to produce Final Fantasy XIII (2009), but Shadow of the Tomb Raider (2018) cost nearly $100 million.

These rising costs have made it difficult for video game companies to recoup their production costs with an average price tag of $60. This growing gap is driving them to release more downloadable content (DLC) packs and paid in-game content for maximum revenue per player.

Therefore, creating NFTs as rare collectibles, which can then be sold on third-party marketplaces, makes strategic sense for game companies.

But will gamers actually buy NFTs?

Unfortunately, players don’t seem as enthusiastic about this plan. Ubisoft hit thousands of NFTs for Ghost Recon: Breakpoint and gave them away to users for free, but its users then resold less than 100 in the first 120 days, according to Ars Technica. Indicating that the excitement was low. Konami reportedly generated approximately $150,000 in revenue by selling its Castlevania NFT earlier this year, but that’s still a drop in the bucket for a company that’s expected to generate $2.31 billion in sales this year.

That’s why Square Enix’s decision to sell its western studios for roughly $300 million to chase NFT-based games has raised some eyebrows. He might see creating NFTs as a lower-risk strategy than funding triple-A games like Shadow of the Tomb Raider – which has largely missed its own sales targets – but it seems doubtful that NFTs or NFT-based games will generate as much revenue as its divested franchises.

Most video game companies will avoid NFTs

NFTs seemed like the next big thing last year as retail investors piled into blockchain-related assets. However, inflation and rising interest rates have driven investors away from these riskier assets over the past six months, and cryptocurrency and NFT prices have fallen. This decline is reflected in the crash of Challenge the digital revolution (NYSEMKT:NFTZ)the NFT-oriented exchange-traded fund (ETF) that was launched last December.

This continued market rotation, which may continue for the foreseeable future, could easily wipe out the weakest “altcoins” and most NFTs. I think this wake-up call will convince most video game companies to simply abandon their NFT projects and stick with regular DLCs and in-game content instead.

So, for now, investors should view NFTs as experimental side projects — not significant revenue streams — for most game companies.

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Leo Sun has no position in the stocks mentioned. The Motley Fool has posts and recommends Bitcoin. The Motley Fool recommends Ubisoft Entertainment. The Motley Fool has a disclosure policy.

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