No, Microsoft isn't buying SEGA, and SEGA has no reason to sell

There's apparently a rumor going around that Microsoft could acquire SEGA. That's not going to happen. At the most, we'll see a collaboration.

We shouldn't really have to write this article, and to a lot of you, the rumors of Microsoft buying SEGA are ridiculous. But we thought it prudent to illustrate why this won't happen. The reasons are pretty clear: Microsoft has no real reason to buy SEGA, and SEGA has no reason to sell. It's the same situation as the Sony buying Metal Gear Solid rumors, or the more preposterous Microsoft acquiring CD Projekt RED rumors.

First lets take a look at SEGA. Right now, SEGA is doing pretty good. The Japanese games-maker is an interesting company with a variety of revenue streams that stem from gaming to resort businesses. The latter will probably be hit hard thanks to COVID-19, but SEGA is nowhere near the red. That's usually when companies start eyeing buyouts or even selling off its IPs. SEGA is still making $1 billion+ in quarterly revenues; in Q3'19 during the holiday period, SEGA made $1.7 billion in revenues, and its profits were up a massive 52% YoY to $148 million. To put that into perspective, that's roughly 1/3 of what Xbox makes every quarter.

SEGA is pretty healthy right now and its wealth of IPs and games libraries are the reason. Physical game sales slipped in the holiday period, but overall game segment earnings were up. Big franchises like Yakuza were main drivers, coupled with releases like the SEGA mini.

SEGA also recently made the decision to double-down on existing game franchises, making significant investments into developing sequels and new titles in its most popular IPs. That investment is clearly paying off as it raises year-over-year profits.

Now let's take a look at Xbox earnings and how they pretty much tell us everything we need to know.

In the holiday Q2'20 period ending December 31, 2019, the Xbox division pulled in $3.3 billion driven by strong services and shares of game sales sold on the Xbox Store. That's really what Microsoft cares about most: Games that can tie perfectly into its services ecosystem, which includes Xbox LIVE, Xbox Game Pass, and soon, Project xCloud.

Would Microsoft really buy a company for its gaming division that makes 1/3 of said division's entire quarterly earnings? That's a pretty big buy. Even if SEGA would theoretically sell, it'd sell its IPs before selling itself, and even then Microsoft probably wouldn't shell out the money for it. Plus SEGA's games aren't really lined up for services, with the exception of Phantasy Star Online 2.

The reality is Microsoft doesn't care all that much about Xbox.

The gaming division does indeed make billions every quarter, and typically ~$10-12 billion every year, but this pales in comparison to Microsoft's total empire coffers. Xbox routinely makes roughly 10% (or less) of Microsoft's quarterly earnings. This fact clearly drives one point home: Microsoft isn't going to pay out big for gaming acquisitions any time soon.

Minecraft, which Microsoft bought in 2014 for a hefty $2.5 billion, was a huge exception and was one of Microsoft's best purchases. Minecraft is a live service game through-and-through, and after purchasing, Microsoft folded the game into its service ecosystem and monetized the huge engagement the game offered. Microsoft won't make that kind of acquisition again unless it's prudent. SEGA currently doesn't have a Minecraft equivalent.

No, Microsoft will stick to acquisitions of smaller AA studios. Its Xbox Game Studios banner has swelled with once-independent studios like Ninja Theory and Obsidian Entertainment. These are the kinds of studios that Microsoft will buy, not huge billion-dollar games-makers that've been making games for decades.

Could Microsoft afford to buy SEGA? Yes, of course. Would it be willing to spend the money? No. At least not right now (probably not ever). SEGA just doesn't line up with Microsoft's core service-first ethos, and the value proposition is too skewed. SEGA, on the other hand, has absolutely no reason to sell and is on the rise thanks to its investments into new sequels.