This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Many video game companies have launched non-fungible token (NFT) projects over the past year. Ubisoft (OTC: UBSFF) released NFTs for Ghost Recon: Breakpoint, Konami (OTC: KNAMF) auctioned off NFTs for its classic Castlevania series, and Square Enix (OTC: SQNNY) sold its biggest Western developers -- including the creators of Tomb Raider and Deus Ex -- to fund the development of new blockchain and NFT projects.
But will NFT projects generate meaningful revenues for gaming companies? Let's review the potential profits and pitfalls.
How do NFTs work?
NFTs, like cryptocurrencies, are minted on a decentralized ledger called a blockchain. But unlike cryptocurrencies, they aren't "fungible," or equivalent to each other. For example, a single Bitcoin can be directly traded for another Bitcoin because they have the same inherent value. NFTs can't be exchanged that way because they contain data that is linked to a digital asset like a picture, video, or song.
Simply put, NFTs are digital logs that allow a person to own the underlying digital asset. Digital artists can mint their artworks as NFT token. These represent the 'originals', as opposed to the 'copies' that can be downloaded online -- or they can use algorithms to randomly generate unique digital artworks with a wide range of traits.
Critics claim NFTs are inherently worthless because they're simply links to digitally-copied assets. However, NFT evangelists believe it's the scarcity of those links that give them value -- in the same way physical collectibles like paintings, baseball cards, coins, and comic books 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. Sales of in-game items, which are used to monetize most modern games, have already trained gamers to accept the concept of digital ownership.
At the same time, higher-end 'triple A' video games have become more expensive to produce over the past decade. Ubisoft's original Assassin's Creed (2007) reportedly cost $20 million to develop, but the company reportedly spent $100 million on 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.
Those rising costs have made it difficult for video game companies to recoup their production costs with an average price tag for a game of $60. That widening gap is pushing them to launch more downloadable content (DLC) packs and paid in-game content to maximize revenue per player.
Therefore, creating NFTs as rare collectibles, which can then be sold on third-party marketplaces, makes strategic sense for gaming companies.
But will gamers actually buy NFTs?
Unfortunately, gamers don't seem as enthusiastic about that plan. Ubisoft minted thousands of NFTs for Ghost Recon: Breakpoint and gave them to users free, but its users then resold fewer than 100 in the first 120 days, according to Ars Technica. That indicates that excitement was low. Konami reportedly generated about $150,000 in revenue by selling its Castlevania NFTs earlier this year, but that's still a drop in the pond for a company that is expected to generate $2.31 billion in sales this year.
That's why Square Enix's decision to sell its Western studios for about $300 million to chase NFT-based games raised some eyebrows. It might consider creating NFTs to be a lower-risk strategy than funding triple-A games like Shadow of the Tomb Raider -- which broadly missed its own sales targets -- but it seems doubtful that NFTs or NFT-driven games will generate as much revenue as its divested franchises.
Most video game companies will shun 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 those riskier assets over the past six months, and the prices of cryptocurrencies and NFTs have plummeted. That decline is reflected in the crash of Defiance Digital Revolution (NYSEMKT: NFTZ), the NFT-oriented exchange-traded fund (ETF) that launched last December.
That ongoing market rotation, which could continue for the foreseeable future, could easily wipe out the weaker 'altcoins' and most NFTs. I believe that a 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 consider NFTs to be experimental side projects -- and not meaningful sources of revenue -- for most gaming companies.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
