It could be about cost: big LLMs don’t work locally like most games, and even with server hosting, the context for a well-detailed and non-textual game would grow very fast, so processing it would become slow and/or expensive. These are the current limits for truly generative games.
As for generated content in regular games, I don’t see an issue if the content is high quality and free of errors. People don’t like low-quality content regardless of who generated it - human or LLM. It’s just that there’s currently more bad content coming from LLMs, that’s all
Generating text & audio is relatively cheap. If users paid a $5/month subscription you could generate a couple hours of dynamic npc audio per month and still make a tidy profit.
I have to imagine someone is looking into that, sandbox style games with hundreds of characters who have unique personalities and respond to any input and remember all your interactions... that would be amazing.