It's an initial proof-of-concept. It'll be developed into more complex games eventually, that's not really an issue for it
The main issue is that it's just a facade. It completely lacks the foundation required for a game. It's a world without hard rules, which is a terrible experience for any user. The game isn't determining cause and effect from actions. It's just guessing at what would come next
What's the point of decorating an in-game house if the next time you go there, the AI forgot what was supposed to be there?
What's the point of completing quests if the AI forgets what you've completed?
What's the point of getting new gear if AI hallucinates what gear you have?
There is no progress in an AI generated game because everything is made up as it goes. Google would need to fundamentally change their approach to allow for that
That being said, this and similar technologies could be used to add really cool mechanics in a game that previously weren't feasible. The ability to add a temporary dream-like or watercolor aesthetic easily would be great for small developers to tell stories