Microsoft’s plans to acquire Activision Blizzard for a whopping $69 billion is the latest sign that consolidation in the gaming industry isn’t going to slow down anytime soon.

Why it matters: Convergence is at the center of this consolidation — hardware and software, mobile and PC, social networks and content, industry experts say.

The big picture: Just in the last couple years, the gaming industry has seen unprecedented activity in M&A, private financing and public listings.

• Two of the top three largest acquisitions ever (Activision Blizzard and Zynga) were announced just this month, and the other (Stars Group) was completed in May 2020, per Dealogic.
• In 2021 alone, there were more than 250 gaming deals at a total value of over $38 billion, according to Drake Star Partners.
• Valuations in private financings for gaming companies are also going up, and many are fetching a premium for being part of the excitement around crypto and Web3, says Drake Star Partners' Michael Metzger.

What they’re saying: “I think you’ll see consolidation of entertainment companies under the umbrella of trillion dollar market caps,” chairman and former Glu Mobile CEO Niccolo de Masi tells Axios.

• Gaming companies — which tend to trade at lower multiples — can be quite affordable for the tech giants, he adds. (Glu itself sold to Entertainment Arts a year ago for $2.1 billion.)

Between the lines: Activision Blizzard CEO Bobby Kotick told VentureBeat this week that the company sold because it was “starting to realize that we need thousands of people to be able to execute against our production plans … and that competition for that talent is expensive and really hard to come by."

• Moreover, the combination of rising costs to produce big franchise games and the maturing of the industry is making it harder for companies to absorb big losses if a new game flops, explains de Masi.

But, but, but: It’s hard to ignore the timing of the deal — which coincides with Activision Blizzard’s ongoing workplace issues dragging down its stock price. Less than a year ago, it was trading at over $100 a share, before shedding more than 30% since news that California regulators are suing it alleging discrimination and a sexist culture.

• “The biggest problem, my guess is, is the internal issues,” Metzger tells Axios. With a lot of capital flowing into gaming startups, there are more and more attractive employment alternatives now, he says.
• Mounting backlash from employees and partners reportedly created an opportunity for Microsoft to approach the company in November and provide an alternative path to immediately ousting Kotick, according to the Wall Street Journal.

What to watch: Apple, Amazon and Netflix’s next gaming moves, what happens to Unity and whether EA and TakeTwo remain independent.

Microsoft has managed to avoid Washington's biggest antitrust complaints — but its new deal to buy Activision Blizzard may garner it fresh scrutiny from regulators.

Why it matters: This is the largest ever deal for a gaming company, and Activision Blizzard needs it in order to course correct following months of fallout from the workplace issues that emerged last summer.

Zoom out: The DOJ and the FTC announced this week the start of a process that could potentially reshape antitrust enforcement in the U.S.

Yes, but: "[I]t’s important to remember that a large dollar value doesn’t always mean competitive concerns, just as a small deal can raise antitrust problems," Daniel Francis, a Harvard law professor and former deputy director of the FTC's Bureau of Competition, tells Axios' Ashley Gold.

• "The agencies (and ultimately courts) are focused on whether competition is harmed, not just whether the deal is expensive. And that means a close look at documents, data and the views of market participants," he adds.

The bottom line: It will depend on how regulators define the market at hand — and whether the deal would make it possible for Microsoft to wield outsized power over that market.

Activision Blizzard's sale to Microsoft may be the solution to the sexual harassment and discrimination problems it's been facing, but there's no guarantee it'll work.

Between the lines: Big, sweeping changes are usually what stakeholders want to see from embattled companies — but as usual, the devil is in the details:

CEO Bobby Kotick: While Axios and others have reported that he's expected to step down once the merger is complete, the companies will still face questions from employees and investors over whether he walks away with a hefty exit package.

• The WSJ reported in November that Kotick knew about these issues for years but ignored them and even chose not to publicize a recent investigation and string of firings right before the holidays.
• Microsoft is probably also hoping to avoid a repeat of ex-CBS CEO Les Moonves' departure: He entered arbitration (and later settled) after being denied his exit package.

Microsoft's workplace: Microsoft will have the hard task of gaining the trust of Activision Blizzard employees and persuading them it can take the workplace in a new direction with better policies and enforcement.

• For its part, Microsoft announced last week a new investigation into past allegations and handling of sexual misconduct, including those against co-founder Bill Gates.

California lawsuit: And looming over all of this is an ongoing lawsuit filed last year by California's Department of Fair Employment and Housing, alleging that Activision Blizzard has systemic issues with sexual harassment and discrimination.

• Whatever the outcome of the state suit, Microsoft will have to take responsibility for it — and for choosing to acquire a company with such a reputation.

Unionization: A wildcard for Microsoft is whether it'll have to manage newly formed unions.

• A group of workers at an Activision Blizzard game studio in Wisconsin announced Friday it's forming a union — and asked the company for formal recognition. A separate group of workers began taking steps to form a union last month as well.

• Larry Fink to CEOs: Treat your workers well (Axios)
• Most video game companies not addressing toxicity, survey finds (Axios)
• Companies under pressure to disclose more information to investors (Axios)

Activision Blizzard became an acquisition target this week, but CEO Bobby Kotick's bought plenty of companies over the years.

• Question: What PC companies did Kotick's prior business unsuccessfully try to acquire in the 80s? (Answer at the bottom.)