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Xbox 360: A billion dollar charge

Thursday, under pressure from competition and complaints about inadequate manufacturing, Microsoft proactively announced substantial changes to the warranty for its Xbox 360 gaming platform.  The company also disclosed they would take an accounting charge in an amount likely above $1b to cover costs related to high repair rates.

xbox360In the gaming industry, Nintendo has been dominating the home console market with a less advanced console that wins on “Wow” factor and user-experience over technology.   That hasn’t stopped Microsoft and Sony from competing for second place with bigger and better technology.

Between the Xbox 360 and the Playstation 3 (PS3) the two have been doing battle with high-power high feature platforms for the title of top tech centric “next generation console.”  Microsoft, though short of its June sales targets (which were adjusted downward in January), has held the advantage with shipments of around 11.6 million units in total, and solid month to month sales. In May, the Xbox 360 outsold the PS3 by a factor of two to one. (Click here for full May sales data)

Unfortunately, the move to manufacturing consoles has not been without troubles for the Redmond, Washington company.  The Xbox has been plagued with unusually high failure rates.   According to some reports the “three flashing lights” indication of system failure has plagued as many as 30% of the consoles (Microsoft hasn’t released actual numbers. The official line is only that the failure rate is well within industry standards of 3 to 5%.  Anecdotal evidence and comments from game store employees hints at a more serious problem but most efforts to pin down an actual number are entirely speculative and unqualified.).

Microsoft has acknowledged they have a problem. To remedy the issues and reassure both existing and new customers Microsoft is extending the warranty on the console from one to three years.  The company will also fix or replace all systems that have broken or failed to perform. The expected cost of the warranty modification, repairs and replacements could amount to the equivalent of an added $100 in cost, per unit, for all of the units sold to date.  The accounting charge will fall between $1.05 billion to $1.15 billion, before taxes, for the quarter that ended June 30.

Robbie Back, president of Microsoft’s entertainment devices division has said he doesn’t believe the charges will impact the company’s plan for the gaming division to turn a profit in fiscal 2008.  (Microsoft Fiscal year and Q4 2007 ended June 30th and results are scheduled to be announced July 19.  Q1 2008 is now underway)

Sony, will try to capitalize on the Microsoft news and use it as an opportunity to gain some ground.  In what is being reported as an unrelated event, a much called for price drop on Sony’s PS3 consoles is expected.   It is not yet confirmed but early reports are saying there will be a retail wide drop of $100 per console beginning on July 12th.   The pricing adjustment may only be a time-limited sale but it’s most likely an official price cut.

Xbox 360 owners with questions are recommended to call Microsoft at (800) 4-MY-XBOX (469-9269) or visit their website at for more information about the changes to their warranties.

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