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July 5, 2007

Microsoft takes $1 billion charge over Xbox 360 defect fix

Posted by David Hunter at 7:17 PM ET.

Recently there have been increasing rumblings about an unprecedented defect rate on the order of 30% in Microsoft’s Xbox 360 game console (e.g. [1], [2]). Today Microsoft acknowledged the problem and promised to fix it at the estimated cost of $1 billion:

Microsoft Corp. today announced that it will expand its global Xbox 360™ warranty coverage. Any Xbox 360 customer who experiences a general hardware failure indicated by three flashing red lights will now be covered by a three year warranty from date of purchase. All other existing Xbox 360 warranty policies remain in place.

As a result of what Microsoft views as an unacceptable number of repairs to Xbox 360 consoles, the company conducted extensive investigations into potential sources of general hardware failures.  Having identified a number of factors which can cause general hardware failures indicated by three red flashing lights on the console, Microsoft has made improvements to the console and is enhancing its Xbox 360 warranty policy for existing and new customers.

Microsoft stands behind its products and is taking responsibility to repair or replace any Xbox 360 console that experiences the “three flashing red lights” error message within three years from time of purchase free of charge, including shipping costs. Microsoft will take a $1.05 billion to $1.15 billion pre-tax charge to earnings for the quarter ended June 30, 2007 for anticipated costs under its current and enhanced Xbox 360 policies.

In case you were wondering, competitive consoles don’t seem to be having anywhere near the same failure rate. Theories abound as to what the actual problem is, but Microsoft has not been specific.

Update: In the call to discuss the problem it also came out that the Xbox 360 is going to miss the 12 million unit sales target for fiscal 2007 by 400,000 units. The target had been reduced from 13-15 million units in January.

Filed under Financial, General Business, Microsoft, Public Relations, Xbox

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9 Responses to “Microsoft takes $1 billion charge over Xbox 360 defect fix”

  1. Sony cuts PS3 price, Microsoft to respond? -- Microsoft News Tracker Says:

    [...] The difficulty, of course, is that while Microsoft may have shuffled its $1 billion Xbox 360 defect repair bill into the last fiscal year, it still has been touting 2008 as the (fiscal) year that the Xbox 360 would finally make money and the current Xbox 360 already sells at a loss. Therefore, any Microsoft price cut may well wait until Microsoft can introduce a cost-reduced design (Dean Takahashi suggests Project Falcon in the fall). [...]

  2. Xbox 360 gets a paint job, not a price cut -- Microsoft News Tracker Says:

    [...] Perhaps, despite all the evidence to the contrary, Microsoft’s management has some “double secret” plan, but it remains clear that the belated billion dollar band-aid has tainted Microsoft’s reputation in the game console business (or worse); the success of the Nintendo Wii has blind-sided them; and reciting the mantra that the Xbox 360 will be profitable in fiscal 2008 with the help of some creative accounting doesn’t dispel the fact that it has been a very bad business venture for Microsoft. The question is whether, ignoring all the sunk costs, there is any expectation of it becoming a worthwhile investment in the future compared to Microsoft’s other opportunities.   Filed under Coopetition, Xbox, General Business, Financial, Sony, Microsoft, Nintendo   [Permalink] [TrackBack] [...]

  3. Shane Elrod Says:

    Is this warranty retroactive to the original launch batch of 360′s. I have sent my 360 in twice, the first time it was covered. However, the second time I had to pay around $150 to get it fixed. I haven’t had any problems with the new one, but is there anyway I can get the $150 refunded?


  4. David Hunter Says:

    Shane, per the press release: “For any customer who has previously paid for repair expenses related to the three flashing lights error message on the Xbox 360 console, Microsoft will retroactively reimburse them.” As long as that was the problem, you should be reimbursed so contact Microsoft support.

  5. Cost reduced Xbox 360 coming this month? -- Microsoft News Tracker Says:

    [...] Rumors of a new technology release of the Xbox have been around for a while (e.g. Project Falcon, Zephyr), but whatever new features can be worked in, the big prize is cost reduction on the money-losing game console (and expensive faults eliminated), particularly in view of the recent price cut. Ben Kuchera reports at Ars Technica that a source tells him that the Xbox 360 midlife kicker is on the way perhaps as soon as this month. [...]

  6. Microsoft’s Robbie Bach a master of bad timing -- Microsoft News Tracker Says:

    [...] There was a bit of a kerfuffle in July when it was revealed that Microsoft Entertainment and Division President Robbie Bach sold $6.2 million in Microsoft shares in the run-up to the announcement of the billion dollar band-aid for defective Xbox 360 units. Executives often use scheduled stock sales to avoid any appearance of insider trading and still pick up some walking around money, but Bach’s sales were unscheduled. Now it turns out he actually sold an additional $3 million worth of shares that somehow fell through an insider sale reporting crack: [...]

  7. Can Halo 3 redeem the Xbox 360? -- Microsoft News Tracker Says:

    [...] Since E&D dropped about $200 million last quarter if you exclude the billion dollar band-aid, it certainly is possible. Of course, it begs the question of how long it would take Halo 3 to pay off the billion dollar band-aid as well, but it’s hard to consider Microsoft’s Xbox program as any sort of investment without a very long term view. [...]

  8. eddie Says:

    hi im in ireland and my xbox has the 3 flashing
    red lights fault..
    and i want to know where to send my xbox to get it repaired
    please any one text me to let me know..

  9. Microsoft 4Q08 earnings strong but fail to impress Wall Street | Microsoft News Tracker Says:

    [...] income for 4Q07 is distorted by the $1 billion dollar charge for defective Xbox consoles, but after you get rid of that it looks like not much has changed for E&D despite sales being [...]

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