Microsoft Expands Xbox 360 Warranty, Takes Billion Dollar Hit

By Carlos Bergfeld, Jul 05, 2007 4:38pm PDT Xbox 360 owners fearing the "Red Ring of Death" can rest easier. Microsoft announced an extension to the Xbox 360 warranty today protecting owners from general hardware failure for three years from purchase date.

The extension applies to any Xbox 360 owners whose consoles flash the all-too-familiar three red lights when attempting to boot up. The error has plagued many disgruntled Xbox 360 owners since the system's launch.

"Over the past couple of months, the number of repairs to Xbox 360 consoles has been unacceptable to us," said Robbie Bach, president of Microsoft's Entertainment and Devices Division, in a conference call regarding the expanded warranty.

Bach also said Microsoft has "already made improvements to the Xbox 360 console that will reduce these issues going forward." This may refer to reports of Xbox 360s being outfitted with extra heat sinks to prevent console failure.

Shacknews recently reported on an independent repair center declining to accept Xbox 360s and an individual who had sent his console back to Microsoft more than 10 times.

Microsoft has estimated the extended warranty will cost the company between $1.05 billion and $1.15 billion, and is noting this charge on its earnings for the quarter ended June 30.

"In arriving at this charge we completed a comprehensive analysis which included key assumptions around factors such as expected Xbox 360 return rates, average repair costs per unit, and the ability to resell returned units," said Microsoft CFO Chris Liddell in the same conference call.

Despite this substantial charge, Liddell said the company will remain on target with stated goals.

"We do not expect the changes announced today will have an impact on the Entertainment and Devices Division's fiscal year '08 financial outlook," he said. "The long-term fundamentals of the business remain strong, and we are maintaining our goal of FY08 profitability for both the Xbox business and the Entertainment and Devices Division overall."

Customers who paid for out-of-warranty general hardware failure will receive a reimbursement check from Microsoft in 10 to 12 weeks.

Microsoft posted an open letter from corporate VP Peter Moore apologizing for the ordeal as well as an FAQ summarizing the process.

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  • I'm gonna be sure to point the next idiot I see bashing "Micro$oft" for being "evil" to a news story about this... This is one of the more incredible things I think I've ever seen a major corporation do. Taking a $1 billion+ hit to make sure their customers are taken care of and a problem is solved? Wow. They could have very easily tried to cover this up or just tell people they were out of luck and to pay for the repair while they quietly started introducing new units with the fix. Kudos to Mr. Gates and all at MS for having the balls to do this right.

  • Quotes from the MS conference call:

    - According to Bach, the hardware problems with the Xbox 360 console "wasn't on our radar" during the console's first year in sales. The problems started to become more apparent to the company only in the last couple of months.
    - Bach also said the issues were a Microsoft design problem and not an issue with assembly and manufacturing at the plants where the console is made. Bach would not say specifically what design issues were found but did say, "It's really our responsibility, not anyone else's"
    - Bach also would not comment on what the Xbox 360 return rate is, saying only that "It's a meaningful number."
    - Bach stated that he is confident that the Xbox 360 hardware design issues have now been resolved. The one time charge for the new warranty policy will affect Microsoft's just completed fiscal year 2007 financials. For fiscal 2008, which began on the first of July, the company is still projecting that the Entertainment division of Microsoft in general and the Xbox section in particular will become profitable.
    - During the conference call, Microsoft officials stated that globally 11.6 million Xbox 360 consoles have been sold as of the end of June. This number is slightly below Microsoft's earlier projections of 12 million consoles sold by the end of their fiscal year. The conference call did not state what the company's goals are for the just started fiscal 2008 year.
    - Finally, Bach said that he is confident that the Xbox 360 business is still strong despite these hardware issues, saying that 90 percent of Xbox 360 customers polled would recommend them to friends. He also said that the company would make some major announcements at next week's E3 2007 saying that their game line-up for fiscal year 2008 will be, "one of the best in games history, if not the best."