Gaming

Yes it does matter. It still gives them advantages

Which haven't manifested in market share.

This makes it harder for upcoming innovators to compete, when that is what they have to face (or be bought out by).

It's shortsighted to assume Sony, Microsoft and Nintendo is what this industry will ever be and it's the most competitive we can expect it to be.

No, it's the only thing one can reasonably expect short an absolutely unpredictable paradigm shift. The longer this market has existed, the more difficult it is for a competitor to get into because the stakes and production values have been raised so high. There's a reason you don't see companies lining up to get into the microprocessor business, and it's because working with silicon requires an enormous capital investment. The only new players who emerged in this industry did so when mobile processors became that paradigm shift to shake things up. While these things are pretty much inherently unpredictable, the only one I can see happening is if consoles disappear entirely in favor of a more unified, open format akin to a PC, which means these three players are no longer in the industry for the reasons they are now.

That is the business that they are in. Lets see how they are doing and how much they need more when these come out. Why should they acquire more if it isn't even proven that they are handling the others well?

The fact that they didn't become a runaway success immediately after acquiring all of those other companies, including Mojang and Bethesda, is why the merger was allowed to go through. If we're talking about breaking up Microsoft, as a non-expert, I imagine the gaming arm of it stays in one piece.

If anything, those layoffs are not a good indication.

Everyone in tech had layoffs. Not only is it common after a merger, it's also common when credit becomes more expensive and the economy contracts.

Worse for who? Nintendo's consoles are profitable and Microsoft can definitely afford to sell units at a loss so that they can sell games, which is the same that Sony does.

It's worse for the consumer if Sony doesn't have a Microsoft to keep them in check. Now if you want a console that plays Grand Theft Auto VI, there's one place to go (because you're not playing that game on a Switch). The market is cornered. Microsoft can only sell consoles at a loss and stay in the market if their install base is large enough to make that money back later. No one knows what their break-even point is, but if they don't sell enough consoles, they're not getting enough game sales or Game Pass subscriptions to make that math make sense, and they have no incentive to continue producing consoles.

I see a lot of these arguments are ultimately taking pity on Microsoft

Don't mistake anything I'm saying as pity for Microsoft. They are where they are in the market because they tried to sell a horrible product back in 2013, for more money than their competitor did, and they divested themselves of a lot of studios that, long-term, could have dug them out of that hole in favor of some bad bets for where the market was headed. Also, I'm a Linux nerd. I could hardly be less interested in seeing Microsoft succeed. What I would hate more though is if Sony ran away with an entire sector of the market when they're doing a lot of nasty anti-consumer stuff too, including trying to acquire exclusivity of a lot of the stuff Microsoft just bought.