Microsoft to fix Xbox 360s, take $US1B-plus charge

Microsoft said it will take a $US1 billion charge to its earnings and start a program to fix hardware problems on the Xbox 360.

Microsoft expects to take an earnings charge of over $US1 billion for the quarter that ended in June related to expenses it will incur fixing faulty Xbox 360 machines.

On Thursday, Microsoft said it will expand its warranty coverage to Xbox 360 customers who have a certain type of hardware failure. The new program is a result of an "unacceptable number of repairs to Xbox 360 consoles," Microsoft said.

Customers who have a general hardware failure that is indicated by three flashing red lights on their consoles will now be covered by a three-year warranty starting on the date of purchase. Microsoft will repair or replace the console, including cost of shipping, within that time frame. The company will also reimburse customers who have already paid for the repairs.

Microsoft also said Thursday that sales of the Xbox 360 had fallen short of expectations. It had hoped to have sold a total of 12 million at the end of June, the close of Microsoft's fiscal year, but finished the year with 11.6 million, said Chris Liddell, senior vice president and chief financial officer at Microsoft, during a conference call to discuss the new warranty and earnings charge.

Microsoft expects to take a $1.05 billion to $1.15 billion pre-tax charge for its quarter ending June 30 because of expenses related to repairing and replacing consoles as well as repairing or writing off consoles that are made but not yet sold, Liddell said.

Customers have been reporting hardware problems since the consoles first hit store shelves in 2005, said Billy Pidgeon, an analyst with IDC. However, Microsoft argued that isn't so. "For the first year plus, this was something that was not on our radar," said Robbie Bach, president of Microsoft's entertainment and devices group, during the conference call. "In the last couple of months we started to see a significant increase in repair requests ... so we geared up to respond to that appropriately," he said.

Although Microsoft isn't disclosing the exact failure rate, it's high, Bach said. "Suffice it to say that with a $1 billion charge ... it's a meaningful number and one that we take seriously and clearly has our attention," he said.

The executives also wouldn't describe the exact problem but said it is a combination of issues for which Microsoft, and not any manufacturing partner, is to blame. "It's our responsibility, not anybody else. ... We understand the issues and have made changes to dramatically reduce the problem going forward," Bach said.

Because Microsoft is taking the charge during its fiscal 2007 year, the company still expects to turn its first profit in its entertainment division, which includes the Xbox, for 2008, Liddell said. Offering this enhanced warranty should give customers confidence in the product, he said.

Analysts agreed that the new warranty offer was something Microsoft had to do. "I think it's a very smart move on their part to shore up loyalty," said Pidgeon.

Such loyalty is very important for Microsoft because of its plan for making a profit from the Xbox. "From a business perspective, Microsoft has to do this. If the failure rate is high, it means a lot of unhappy customers, but more importantly, customers who aren't buying games," said Matt Rosoff, an analyst with Directions on Microsoft. Microsoft sells the consoles at a loss, making a profit from the games that users buy.

He's not convinced the new warranty can keep sales up for Microsoft. Gamers who may be deciding between a new Sony PlayStation or an Xbox may worry about this hardware problem. "Even though [Microsoft has] said, 'don't worry, we'll replace it for you,' it's that perception of quality, and it's hard to reverse once it's out there," he said.

Join the Good Gear Guide newsletter!

Error: Please check your email address.

Our Back to Business guide highlights the best products for you to boost your productivity at home, on the road, at the office, or in the classroom.

Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Nancy Gohring

IDG News Service
Show Comments

Most Popular Reviews

Latest News Articles

Resources

PCW Evaluation Team

Azadeh Williams

HP OfficeJet Pro 8730

A smarter way to print for busy small business owners, combining speedy printing with scanning and copying, making it easier to produce high quality documents and images at a touch of a button.

Andrew Grant

HP OfficeJet Pro 8730

I've had a multifunction printer in the office going on 10 years now. It was a neat bit of kit back in the day -- print, copy, scan, fax -- when printing over WiFi felt a bit like magic. It’s seen better days though and an upgrade’s well overdue. This HP OfficeJet Pro 8730 looks like it ticks all the same boxes: print, copy, scan, and fax. (Really? Does anyone fax anything any more? I guess it's good to know the facility’s there, just in case.) Printing over WiFi is more-or- less standard these days.

Ed Dawson

HP OfficeJet Pro 8730

As a freelance writer who is always on the go, I like my technology to be both efficient and effective so I can do my job well. The HP OfficeJet Pro 8730 Inkjet Printer ticks all the boxes in terms of form factor, performance and user interface.

Michael Hargreaves

Windows 10 for Business / Dell XPS 13

I’d happily recommend this touchscreen laptop and Windows 10 as a great way to get serious work done at a desk or on the road.

Aysha Strobbe

Windows 10 / HP Spectre x360

Ultimately, I think the Windows 10 environment is excellent for me as it caters for so many different uses. The inclusion of the Xbox app is also great for when you need some downtime too!

Mark Escubio

Windows 10 / Lenovo Yoga 910

For me, the Xbox Play Anywhere is a great new feature as it allows you to play your current Xbox games with higher resolutions and better graphics without forking out extra cash for another copy. Although available titles are still scarce, but I’m sure it will grow in time.

Featured Content

Latest Jobs

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?