Xbox 360 'red ring of death' costs Microsoft more than $1B

Surge in bricked consoles moves Microsoft to admit design flaws, extend warranty and offer free repairs

Microsoft Corp. said today it was taking a $1 billion-plus charge against earnings to extend the warranty of all Xbox 360 consoles because of an "unacceptable number of repairs" caused by design flaws in the video game machine.

During a conference call with financial analysts and reporters, Robbie Bach, the head of Microsoft's entertainment division, and CFO Chris Liddell announced the warranty change and spelled out its financial impact. After touting the Xbox 360's success, Bach turned to the matter at hand. "But there's one area of the business where we're not doing a good enough job," he said. "Over the past couple of months, the number of repairs for the Xbox 360 console have been unacceptable to us."

Under the new warranty, any Xbox 360 console that shows three flashing red lights -- the error signal for the vague "general hardware failure," dubbed by some users as the "red ring of death" -- will be repaired free of charge for up to three years from its date of purchase, said Bach. Shipping will be included. Customers who have already paid $139 and more for out-of-warranty repairs will be reimbursed.

To pay for the anticipated warranty repairs, as well as evaluate and fix machines still in inventory, Microsoft said it would take a $1.05 billion to $1.15 billion charge against earnings for the quarter that ended June 30. Liddell said the charge would be equally split between repairs of already-sold systems and fixes to those still in stock. Some inventoried consoles might be junked if repairs prove too expensive. Using Liddell's figures, the average repair per console sold -- Microsoft said today it had sold 11.6 million Xbox 360s, slightly under its end-of-fiscal-year goal of 12 million -- will cost between $45 and $50.

"This will have no impact on outlook for fiscal year '08," said Liddell. "We are on track for profitability for both Xbox and [the] entertainment [group] overall," he said.

Microsoft wouldn't specify the exact causes of the hardware failure. Bach said only that there were "several factors" that could trigger the error, and that "this is not related to any safety issue." He also claimed that the problems appeared in quantity only the past few months. "This set of issues wasn't visible at all for the first year and more," said Bach. "It was just not on our radar screen. [But] the past couple of months, we've seen a significant increase in call volume, repair volume and attention from people."

The company's own Xbox 360 user forums are full of that attention in the form of complaints. "I have had problem after problem with my 360," said a user identified as "FauxStallion" onMicrosoft's Technical Issues forum . "It had to be repaired 3 times, and then I got a new one, and it broke after 1 month. The bottom line is microsoft has built a terribly poor product and then hides this fact in an extended warranty where you spend most of your time having your 360 in [sic] route to be fixed to Texas or wherever, instead of playing the console."

Other users on the forums are personally familiar with the red ring of death. "Your Xbox is dead," said Endless Flow360 in a reply to another user's query about three flashing red lights.

"If it's any concellation [sic] you're not alone," said Desticado on the same thread. "My 4th xbox since UK launch has just died. (my first one died on launch day!). If it's under warrenty [sic] MS have always been very efficient in my experience. Could be worse though, one friend of mine is now on is [sic] 8th unit!!"

In fact, Microsoft has been dealing with Xbox 360 hardware problems since the console debuted in November 2005. Within days, users flooded forums with reports of consoles overheating and intermittently crashing. Lawsuits were filed in Illinois in 2005 and in California the next year against Microsoft; the latter sought $5 million in damages. In December 2006, Microsoft extended the Xbox 360 warranty for U.S. and Canadian buyers from 90 days to one year; as in today's announcement, Microsoft said then that it would reimburse customers who had paid for out-of-warranty repairs.

In a Q&A session with analysts today, Bach would not put a number to gone-south systems. "It's a meaningful number. It has our attention." He also said Microsoft took full responsibility for the problem. "It's our responsibility. Our suppliers have done good work, and we will continue to work with them. Think of it as a Microsoft design challenge."

The problems have been addressed, Bach stressed, and with the design tweaked and manufacturing reset, new machines should be free of these failures. "We think we have our hands around it at the engineering level," Bach said.

Both Bach and Peter Moore, the executive who heads the Xbox group within Bach's division, apologized to users. "If we have let any of you down in the experience you have had with your Xbox 360, we sincerely apologize," Moore said in an open letter posted to the company's site. The company has also created a FAQ that includes additional information about the warranty extension.

Microsoft will be showing a new slate of Xbox 360 games at next week's E3 Media & Business Summit in Santa Monica, Calif. E3, once a massive consumer-oriented show, has been recast as a smaller trade show for developers, retailers, and the press.

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