In response to concerns over 'Red Ring of Death,' Microsoft extends XBox 360 warranty to 3-years

Friday 06th July 2007, 02:07:00 AM, written by Carl Bender

Microsoft today made the surprise announcement that they will be extending all XBox 360 warranties to three years with regard to their application towards the "red ring of death" issue (other hardware issues will remain addressed via current 1-year coverage). In supporting this move, MS is expecting to take a charge of between $1.05 and $1.15 billion dollars, to be reflected in the upcoming report for the fiscal quarter ended June 30th. On a conference call held with analysts this afternoon to discuss the move, several facts emerged with regard to the XBox business performance and outlook, as well as some insights into how the problem has been perceived within Microsoft.

An issue that has gained increased traction with the press over the past several weeks, it was disclosed by Microsoft that the reported rate of hardware failure has seen a marked increase over the last several months relative to the first twelve. Without giving hard figures when asked - which Microsoft has been reticent to discuss for some time - Robbie Bach stated that the failure rate "has been unacceptable," while saying also that the issue "wasn't on our radar screen" for the first year post-launch. Increased call volumes, repair requests, and press coverage triggered an investigation of the 360 hardware within Microsoft that has led to the identification of several problem areas within the design of the console.

Microsoft went further by indicating that the problems have not been local to their suppliers, but rather a failure of design that has been corrected and addressed via a revision of the fundamental hardware. Though not explicitly described, such a change will likely take the form of a motherboard revision, as well as possible component placement changes - both factors that have been fingered in the past as probable causes for the ''red ring'' failures.

In terms of the ~$1 billion charge, roughly half will be taken up front to account for existing consoles in the consumer space affected by the issue, as well as to absorb losses due to existing inventory Microsoft will write-off as a result of the failures. As Microsoft is providing their warranty retroactively, an important aspect of the extended coverage will take the form of a refund given to all 360 owners who have paid to have their ''red ring'' issues corrected while out of warranty. Beyond the regular accounting that has reflected warranty coverage expenses quarter-to-quarter, this one-time effort towards resolving current issues will result in a roughly $40/console cost for all units shipped thus far by Microsoft.

The second half of the ~$1 billion charge covers what Microsoft feels will be liability exposure over the next 18 months or so as a result of the extension, and will be drawn against cash on hand on an incremental basis, as that liability is realized going forward.

Although the context of the conference was to highlight the warranty extension and its financial toll on Microsoft, the tone of the conference on the part of the Microsoft representatives was nevertheless upbeat. The call was used to frame the situation going forward as one in which Microsoft feels it is "in a good position strategically," with what it believes will be one of the strongest game lineups of all time at this years E3.

By taking the full charge for expected extraordinary warranty costs in the present quarter, Microsoft felt comfortable reaffirming their goal of profitability for the Entertainment and Devices division in fiscal 2008 as on track to be met; the goal of achieving profitability this fiscal year has been a longstanding target within the division.

During the conference call, it was also revealed that in the fiscal year ended June 2007, 11.6 million Xbox 360 consoles had shipped; 400,000 shy of the public target of 12 million.

The official Microsoft press release is viewable here; a letter to XBox owners by Peter Moore, here.

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Latest Thread Comments (23 total)
Posted by Farid on Friday, 06-Jul-07 15:01:57 UTC
Quoting Cyan
desperate situations call for desperate measures. B3D staff, please allow the guy to merge the two threads. Please, please. Maybe you are not a bot wannabe after all. :cool:
We will implement that feature in the future, since we too dislike having redudant threads with the same topic.
But right now, the news comment thread has to be a discrete thread or else it won't show on the site.

Posted by Tap In on Friday, 06-Jul-07 16:41:33 UTC
Quoting Carl B
.... By taking the $1 billion charge in the past quarter, Microsoft - though making the overall life of the 360 a billion less profitable - neutralizes the effect of warranty servicing on future quarters, thus allowing them to pursue whatever their pre-existing price cut plans may have been without any sort of effect to their financials beyond what was already planned for. And I certainly must assume that a price cut has been part of their already laid plans for fiscal '08.
Marry me. :wink:

Posted by jb on Friday, 06-Jul-07 19:29:45 UTC
No need for two threads on the same topic...lock one please.

Posted by Carl B on Friday, 06-Jul-07 22:23:31 UTC
Quoting jb
No need for two threads on the same topic...lock one please.
You're not one who reads a thread before he posts, are you?

Posted by Moonblade on Thursday, 12-Jul-07 16:02:09 UTC
Quoting Carl B
Well, keep in mind they held a conference call yesterday to address just those issues you are wondering about in terms of an explanation to shareholders.
I found something interesting here

Quote
MarketWatch is reporting that Robbie Bach, head of Microsoft's entertainment and devices unit (which includes the Xbox 360), sold $6.2 million in company stock between May 2 and last week's announcement that the company would extend the warranty on the system for certain failures to three years. *Bach's sales came after eight months of selling no company stock.*

Bach himself did not comment on the story, but a Microsoft spokesperson insisted that the stock sale and the warranty were completely unrelated, saying "[He] continues to hold a significant stake in Microsoft and remains confident in the long-term success of the company." In the two months before the announcement, *two Microsoft employees sold more stock than Bach: General counsel Brad Smith, who said he used the money he made to purchase more Microsoft stock, and Bill Gates*.

Posted by Carl B on Thursday, 12-Jul-07 16:37:53 UTC
I saw that this morning, actually on Marketwatch.I didn't think I'd make mention of it because honestly when it comes down to it... the 'dirtiest' looking scenario is that Robbie Bach has stock, he knew this announcement was coming, and he was worried that it would negatively impact the stock price. So, he sold some stock.Hell, that makes sense to me! I would too. Nothing nefarious IMO, just unseemly. And even then, this is the worst case - it could have simply been coincidence (though honestly I would have if I were him).Something much more relevant I found on Marketwatch - that I didn't post in the 360 price thread because well, I just didn't feel it was my place - was this article about their present stance on a pricedrop: http://www.marketwatch.com/news/story/microsoft-says-no-cuts-planned/story.aspx?guid=%7B1D083C7C%2DA67D%2D4F7C%2D92DD%2D9B8C060542EE%7DLike Sony's own official price-related statements though, it's hard to know what's simply smokescreen and what is real intent.

Posted by infinity4 on Thursday, 12-Jul-07 17:09:07 UTC
Quote
Microsoft extends XBox 360 warranty
what about dvd scratch issues? :roll:

Posted by Carl B on Thursday, 12-Jul-07 17:17:59 UTC
Quoting Ant1Fanb0y1sm
what about dvd scratch issues? :roll:
http://www.dailytech.com/article.aspx?newsid=7992

Posted by Tahir2 on Thursday, 12-Jul-07 23:29:37 UTC
_Nevermind_

Posted by Cyan on Friday, 13-Jul-07 15:55:39 UTC
New interview with *Peter Moore* from Eurogamer. He talks on the Red Rings issue, the E3 conference and much more. Very interesting stuff and, again, he shows why I consider him one of the best executives ever in the industry. Maybe he isn't the best guitarist out there but he looks like a good person to me. Link to the full interview and quotes: http://www.eurogamer.net/article.php?article_id=79577&page=1 On the E3:
Quote
I did have a look at the normal blogs I check up on, friends in the UK. If I'm encapsulating the reaction that I've read on the blogs - no disrespect, but I didn't read journalist reaction, *I read what the people thought, and a lot of people in the UK actually got up at 4.30 to watch it, god bless them - was that there wasn't a lot of announcement per se. There was no tattoos, there was no Metal Gear Solid. Maybe the anticipation of these announcements that some people have planted in their minds haven't come to bear*. But we had so much stuff. As well as the rather unusual step of just focusing purely on this year, rather than trying to do some visionary stuff about 2008 and 2009. If I read the mood of the boards correctly on that, it was 70 percent positive, 30 percent negative - wishing we had showed more visionary stuff, wanting to see what 2008's looking like and beyond. And the debacle that was my guitar playing [Moore says he couldn't hear the music properly]. You may have had time to read reaction more than I have, but I literally have not had the chance. So tell me what the reaction is.
I didn't lose sleep over the E3 conference since I think I slept like a top but I watched MS' conference. It wasn't that bad, specially the rock band song and Peter Moore at the guitar. I remember some journalist stating something like that E3 should die this year, that it gets tiresome and so on. Imho, he is right. These conferences (GDC, X07, E3, etc) should be merged into one unitary conference. We don't need a glamorous show like the Oscar awards ceremony one but one where companies push the boat out once a year. Regarding the Rings of Red:
Quote
Eurogamer: What about a cost you have confirmed then which is the billion dollars for the repairs. How hard of a decision was it to make to put all that money into that? Peter Moore: Very difficult decision, but in some instances a very easy decision. We had not done right by the consumer, it was becoming very apparent to us in the last couple of months that we had a number of issues that were creating this problem - the three flashing red lights - and from all the way to the top of the company it is not easy to take a billion-dollar charge. Anything that begins with a 'b' is a lot of money. But we had to do it. We needed to do it. *It was not easy, but one thing people have to understand is how difficult it is when you sit down, you look at your business, and your employees and everyone in your team that has given sweat, blood and tears to get this thing out and you have to make this admission like this that we hit an unacceptable failure rate. **It was a tough day - a really tough day.* But I like to think we did the right thing. Even then you get criticised for doing the right thing - you say look, your arms are up and I've apologised to everybody that's had this, and we're going to take care of people, and what we're doing at three years is pretty much unprecedented, but we need to do that - we really need to do that.
Very honest and open-minded interview if you ask me.


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