Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

[Pai Pai Master]

http://money.cnn.com/2007/07/05/tech...ion=2007070516

LOS ANGELES (Reuters) -- Microsoft said Thursday it would take a more than $1 billion charge in the most recent quarter due to costs for a new extended warranty program for its Xbox 360 video game console.Microsoft cited "an unacceptable number of repairs to Xbox 360 consoles" for the move. Xbox 360 customers who experience general hardware failure indicated by three flashing red lights will now be covered by a three-year warranty, the company said.

The charge will be between $1.05 billion and $1.15 billion, before taxes, for the quarter ended June 30, Microsoft (Charts, Fortune 500) said.

$1,000,000,000 just for warranty repairs is a bit excessive, if you ask me. Hardware issues are something that should be resolved in the first few months of a console cycle, and they never should have been that bad in the first place. At least in the end it's costing them and not us, and it's not like they can't afford it. The issue is unnacceptable in the first place, but it's great of them to extend the warranty to three years just like that.

Kotaku says that any consumer who's had to pay for the problem in the past will be reimbursed and anyone in the future who experiences it will automatically be given the three-year warranty. Microsoft claims that they've found the cause of the problem and are fixing it in newer models. That'll remain to be seen, but if it's true it officially wipes out the 360's biggest problem.

Microsoft Expands Xbox 360 Warranty Coverage

REDMOND, Wash. -- July 5, 2007 --Microsoft Corp. today announced that it will expand its global Xbox 360â„¢ 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.
"The majority of Xbox 360 owners are having a great experience with their console and have from day one. But, this problem has caused frustration for some of our customers and for that, we sincerely apologize," said Robbie Bach, president of Microsoft's Entertainment & Devices Division. "We value our community tremendously and look at this as an investment in our customer base. We look forward to great things to come."

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.

[Malevolent]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

2 weeks after i got my 360 i got the red ring...i just returned it to best buy for a new one...

[Raydeus]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

But then again that's the M$ way, they only cared about releaseing the 360 as early as possible to get a head start over Sony.

And since they succeded in making Sony also rush production for the PS3 we can say M$ acomplished their goal and made this console generation start in a rushed mess.

I just hope that $1 billion is 10 times their projected loss for the move.

[Pai Pai Master]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

Unfortunately I don't think they'll ever tell us how much it hurt them in the long run. The normal losses incurred by selling the hardware as well as the $1B in losses from these repairs probably didn't set them too far ahead of the $1.9B losses Sony posted from their hardware sales, and the PS3 failure rate is reported to be as low as the Wii's, at less than 1%. Was the one-year head start really that beneficial after taking that into consideration, especially when the Wii is about to destroy the 360's install base in the next few months in much less time?

[Raydeus]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

I wonder. Then again M$'s approach has always been to rush things out and then just throw money at problems (as long as it's profitable), and users will eventually have their systems fixed after a few years of patches and maintenences.

But, as long as 360 users are happy with their systems and the games that come out for the console M$'s strategies don't matter much.

The only problem I see is when those strategies force other console makers to rush things and change their way of doing things. I'd hate watching Nintendo and Sony take the M$ approach.

[Icemage]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

Sony and Nintendo hardware this generation is surprisingly robust. PS3 failure rate is very low. Wii failure rate is also very low.

I'm just sad to see the state that all three consoles are in right now. 360's a hardware nightmare. PS3 is overpriced and overengineered. Wii is a gimmick-laden stepchild. None of them really fits the bill for long term success right now.


Icemage

[Pai Pai Master]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

My Wii was defective (yeah, I know how that sounds), but I'm the only Wii owner I know of in that situation. Haven't heard of a defective PS3 either.

Sony and Microsoft are on the mend. Now that the PS3 price cut is 100% confirmed for next week, they're getting on the right track. Justifying buying a $600 console to play a few exclusive titles this year was nearly impossible for most people, but I think $499 sounds a lot nicer on the ears and gets closer to that point. $499 is a much more comfortable price point and it makes the console's extra features seem more like extra features than burdens. I don't think anyone can deny that the system is a tremendous value for $499 or even $599, but it needs to be lower before it can appeal to the masses and actually sell on the level of a bestselling platform. This press release from Microsoft is a sign of good things to come, as the hardware issues are really the only thing plaguing them right now.

Nintendo's going to have a rude awakening if they think they're going to be okay standing still and watching Wii's sell out across the planet for much longer, and I'm hoping I can give them more credit than that. We'll see next week at E3.

[Malacite]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

And since they succeded in making Sony also rush production for the PS3 we can say M$ acomplished their goal and made this console generation start in a rushed mess.

QFT. PS3 should have been held back for at least another year, especially given how strongly PS2 is still doing ; ;

Stupid MS. I'm glad to see they're reimbursing anyone who paid to get the red ring fixed.

[Amele]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

the quoted price probably includes projected warranty costs from extending the warranty, and may include additional labor costs for processing the warranties as well.

I can guarantee microsoft is claiming more than just hardware costs in those numbers.

[nazlfrag]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

I can guarantee microsoft is claiming more than just hardware costs in those numbers.

Why would they want to artificially inflate their losses just before tax time? Oh wait...

[Icemage]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

Why would they want to artificially inflate their losses just before tax time? Oh wait...

My take on this is that this is their easiest way out of the hole that they dug themselves into.

Microsoft rushed the Xbox 360 to market before they finished engineering it, and the absurd failure rate shows.

While it's a magnanimous gesture, with a failure rate of 20-30%+, they leave themselves wide open to a class action lawsuit if they don't take extraordinary measures like this; and with figures that insanely high, such a class action lawsuit would very likely succeed.

Actually the timing is a bit odd too. They could have announced this at any time, but it seems like it's a damage control move in advance of E3; hot on the heels of this announcement, Halo 3 will arrive in a couple of months to help them offset the losses here (even so, it won't generate a billion dollars in revenue though - not even close).


Icemage

[jwalton]

Re: Red Ring of Death Costs Microsoft $1 Billion, Warranty Extended to Three Years

I think you missed nazlfrag's point: they wrote this off as a potential loss just before tax time so they'd pay less in taxes.

It's also worth noting that they haven't lost said billion dollars yet. They've simply written the money off and have planned for worst-case-scenario for the course of the warranty program. What they pulled here was pretty slick.