So AI competes with VR both for users (The type willing to pay for cutting edge consumer tech experiences) and investment (AI is the big thing, VR is so 2022), and labour (How many researchers want to work in VR over AI?)
Fittingly, the equivalent projects started by the companies currently trying to stuff generative AI into everything fell completely flat.
People don't care about having AI generate exactly the world they want. People want the "wild"-ness and spontaneity that VRChat offers (finding a cool world someone made, running into real, interesting, people and hanging out with them). The issue being that as VRC grows/grew, they had to start taming that wildness (because it also allows for a lot of things not really compatible with monetization), but that slowly brings them closer to the over-sanitization problem that killed all the competitors.
I bet chatting with Replika or Character AI is satisfying the same needs as VRChat for many of the people that either appeals to. I think that's what they were getting at.
AI doesn't have the sort of cutting edge consumer tech experience of even a basic FPS it's a non-stater here.
AI isn’t going to let you hang out with your friend who is presenting as a nine foot tall naked dragon lady made of gummy candy, and experience getting pulled into one of her orifices and digested. It’s not going to let you pretend to be turned into her horny parts, either. With or without the experience being enhanced by various Bluetooth-connected toys. And AI’s not going to hang out with you in the flesh at a convention later on based on the good times you had in VR and make a lifelong connection, either.