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Xbox problems cost Microsoft $1 bil

Tech giant extending warranty to three years

Defective Xbox 360s will cost Microsoft more than $1 billion on its bottom line.

Tech giant announced Thursday that it will be taking a charge of between $1.05 billion and $1.15 billion and is extending its warranty to three years to address frequent problems in its videogame console.

In a conference call with analysts, chief financial officer Chris Liddell said about half of the charge will account for the extended warranty while the other half is for repairs under the existing warranty.

In December, as problems with the 360 first started to pop up, Microsoft extended the device’s warranty from 90 days to one year.

The newly extended warranty will only address what gamers have termed the “red ring of death,” in which the ring around the console’s power button, which normally glows green, turns red.

“The number of repairs to consoles has been unacceptable to us,” said Robbie Bach, president of Microsoft’s entertainment and devices division, which includes the Xbox business.

Bach added he’s confident engineers have now addressed the “red ring” issue and it won’t happen on consoles sold going forward.

Microsoft is taking the charge in the quarter ended June 30, the fourth on its fiscal calendar. Company is hoping the move will help put problems for its Xbox, which has consistently lost money for the company, behind it.

Liddell said Microsoft is sticking to its goal of reaching profitability for its videogame division in fiscal 2008, which started July 1.

By announcing the charge now, Microsoft is likely also hoping to endure the negative publicity ahead of next week’s E3 conference, where it will focus on its slate of games for the next year, including 360 exclusive “Halo 3.”

Defective Xbox 360s have been a frequent source of complaints among gamers online, with the problem apparently increasing in the past year as the “red ring of death” typically strikes consoles more than one year old.

Though Bach wouldn’t say how many 360s Microsoft has had to repair or replace, he granted that the number is “meaningful” and “clearly has our attention” given the huge charge and the newly extended warranty.

Neither Sony’s PlayStation 3 nor Nintendo’s Wii have encountered significant repair issues, though both only launched in November, a year after the 360. It’s possible that rushing to release its next-generation console a year ahead of its competitors contributed to Microsoft’s current dilemma.

It remains to be seen how Thursday’s move will impact 360 sales, though Microsoft is betting that the short-term negative publicity will be less painful than the growing din of complaints online and in the videogame press.

The Xbox 360 has thus far had mixed success. It currently has a much higher attach rate — number of games sold per console — than the PS3 or Wii. But company also admitted Thursday that it has shipped 11.6 million consoles as of June 30, short of its previously stated target of 12 million.

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