Google’s unveiling of its Genie 3 world model has raised fresh apprehension across the video game sector, according to Morgan Stanley, with several large developers seeing meaningful share price declines in the wake of the announcement.
Analyst Matthew Cost told clients that the Genie 3 launch "has sparked fears that world models could disrupt how video games are produced," and that the implications are significant for firms including Unity, Roblox, Take-Two Interactive and AppLovin.
The model was released to subscribers on 29 January and investors reacted quickly. Following the announcement, Unity shares fell 24 percent, AppLovin dropped 17 percent, Roblox declined 13 percent and Take-Two lost 7 percent.
Morgan Stanley described Genie 3 as becoming "a key debate for the game industry this year." The bank outlined two broad long-term pathways for incumbents: adapt their current toolsets and frameworks to integrate AI capabilities, or risk being displaced by these emergent technologies.
Under the adaptation path, existing engines such as Unity and Roblox Studio would absorb AI-driven tools to automate parts of the production pipeline. Potential areas for automation include coding tasks and the generation of game assets, allowing teams to use these models to streamline workflows while continuing to rely on established platforms.
By contrast, Morgan Stanley noted a second scenario in which world models could supplant present technologies entirely. While that outcome may appear conceptually straightforward, the bank argues it faces substantial technical barriers.
The analysts pointed to structural limitations that persist in current world models. They said such models can already create "playable, video game-like worlds," but that core issues remain unresolved. Specific challenges named by Morgan Stanley include "determinism, memory, and updates," problems that could undermine consistency and reliability in multiplayer or persistent environments.
Because world models operate probabilistically rather than deterministically, Morgan Stanley warned they lack a single, authoritative "source of truth." In practice, this could mean that multiple players might not observe the same game state at the same time, raising questions about feasibility for many genres and applications.
Given these technical constraints, Cost indicated the adaptation scenario is more plausible in the nearer term. Companies are therefore more likely to incorporate AI to enhance production processes while "leveraging existing solutions" rather than attempting to replace established engines outright.
While the debate over Genie 3's disruptive potential continues, Morgan Stanley’s view suggests the immediate market reaction reflected uncertainty about how quickly and completely the sector might change. The bank’s framework frames near-term outcomes as either augmentation of current development stacks or a more distant, technically challenging shift to world-model-driven production.