Surprisingly, I think this is potentially a good thing. To be honest I have few objections to visiting real businesses/locations during video games, especially when they fit the plot. The idea of free promotional items/content is also pretty cool as long as they fit the game. The biggest problem with this promotion seems to be the shield saying "Pizza Hut" that prominantly, it doesn't look paticularly good.
In the case of Phantasy Star the game has never been straight fantasy, you fly to other planets on space ships and stuff. No real reason why there couldn't be a Pizza Hut.
Overall though I see the potential mostly in modern, sandbox type games. Instead of visiting "Mr. Clucks" you could visit an actual KFC for example. In a game like Dead Rising you could run into real stores as opposed to generic ones. The fact that you have Pizza Hut dealing out bloody death shows that companies are becoming a bit less sensitive to things.
Admittedly though I would hope such promotions would be a bit less subtle (I mean you know what your doing). Say for example letting someone run a bit faster and jump a little higher from buying the latest sports shoes being pimped by a company in a game or whatever.
The big issue I have here is simple:
In game advertising has been around for a while. Like digital Downloads the whole idea was that if they could make it work, that savings could be passed on to the gamers by lowering the prices of games.
The thing that bugs me is that with in-game advertising taking off and becoming what was once theorized, your generally not seeing any reduction in the prices of games. This is a sign as to how far it is going, we've already seen things like advertising boards and the like in the backround of commercially released games and the like. I won't even get into WoW's "Game Fuel" promotion (that was classy let me tell you....).
The thing is that if Pizza Hut or another company (or heck multiple companies) want to advertise in a game, I expect my tolerance of the ads and being a captive audience for some of them (ie I want my weapons I have to listen to the Pizza Hut speil) to reduce the price of the game as was always intended when this was all at the concept stage. I don't expect the companies to stick ALL of the promotional dollars in their back pocket.
It's sort of like Digital Downloads. Okay it's here... BUT I see no reduction of game prices for dowloading them. All the money the companies save on shipping, packaging, distribution, etc... is all going into their pockets. This of course meaning both that there is no reason NOT to buy a physical copy of a game, and also that I have no reason to trust these guys even if they DO lower prices because they have made it clear that the way they think they'll just raise them again once the physical copies are dead.
The bottom line is I have no inherant problem with in-game advertising, especially when tastefully intergrated into the game, BUT if they are going to do it I expect the ads to lower the overall costs.
Heck, I'd imagine if they were to actually get a mega-mall's worth of businesses to donate money for advertizing they could release a game like "Dead Rising" for free (or very cheaply, like a couple of bucks) and still make a profit. Then you could say wear actual real-world branded clothing, chop up zombies with a Steil chainsaw, and wield Craftsman tools, cook your food at an actual Burger King, mix your shakes at an actual Orange Julius, and of course throw video game DVDs at approaching undead hordes from behind the counter of an actual Gamestop. :P
What's more they could always ad any in game item benefits to th actual store. So basically if you want the special Steil Chainsaw for zombie busting, you need to find their display in the hardware section at SEARS, want the special Gamestop gun, well it's in the hands of the dead neckbeard in their store-room (right next to ever-changing crates full of copies of whatever anticipated game Gametop is suspected of hording until street date at the moment).
If each company effectively pays for their own store/advertising/promotion... well. :)