Xbox 360

[quote]By Nick Wingfield

In a blow to its videogame business, Microsoft Corp. said it will take a $1.05
billion to $1.15 billion pretax charge to cover defects related to its Xbox 360
game console, after experiencing an “unacceptable” number of repairs to systems
already sold to consumers.

Microsoft executives declined to discuss the technical problems in detail, but
said that there are a number of factors that can cause malfunctions leading to
a failure of the Xbox 360 systems. The problems are indicated by three flashing
red lights on the front of the console.

(This story and related background material will be available on The Wall
Street Journal Web site,

As a result, Microsoft said it will extend to three years the warranty
coverage on all Xbox 360s for any consumer whose console displays the three red
lights. Previously, the Xbox 360 warranty was for one year from date of
purchase in the U.S. and two in Europe.

"I look at it as one of those things we’re not excited about, obviously,"
Robbie Bach, president of Microsoft’s entertainment and devices division, said
in an interview. “We think it’s something we have to address. We have to
support our customers. I’m still very proud of the product.”

The Xbox 360 costs from $299 to $480.

The product’s warranty essentially covers repairs to consoles affected by the
problem, or replacement if necessary.

The problems represent a costly setback for the Redmond, Wash., software
company’s efforts to profit from the videogame business, which it entered in
late 2001 with the original Xbox as part of an effort to capitalize on the
fast-growing convergence of technology and entertainment. Microsoft introduced
the successor to its original product, the Xbox 360, in November 2005 and says
it has shipped 11.6 million of the consoles to retailers around the world.

Microsoft, so far, leads its competitors in the market for the latest
generation of games hardware, in part because it began selling the Xbox 360 a
year before them. In the U.S. market, retailers have sold 5.6 million Xbox 360s
to consumers, compared to 2.8 million of Nintendo Co.'s Wii and 1.4 million of
Sony Corp.'s PlayStation 3, according to market-researcher NPD Group Inc.

But Microsoft’s game efforts have been a consistent money-loser for the
company. In the past three fiscal years, Microsoft has reported a cumulative
operating loss of $3.08 billion from its home and entertainment division, of
which the Xbox 360 is the dominant product.

The problems with the Xbox 360 also point to pitfalls as Microsoft has moved
beyond its traditional competency of software engineering into hardware. The
losses from its game business for the original Xbox partly stemmed from
Microsoft’s inexperience in the hardware manufacturing business.

With the Xbox 360, some analysts said Microsoft may have inadvertently made
compromises in quality of the consoles in its race to be the first to market
with a new games system. "They made it a mandate to beat Sony and Nintendo,"
said Richard Doherty, a consumer-electronics analyst with Envisioneering Group.
“Maybe beating them had hidden cost associated with it.”

Mr. Bach declined to say what percentage of Xbox 360s are defective, though he
said the “majority” of Xbox users aren’t experiencing the problems.

A person familiar with the matter said the problem related to too much heat
being generated by the components inside Xbox 360s.

Mr. Doherty, for one, says the magnitude of the charge Microsoft is
taking-which represents nearly $100 for every Xbox 360 shipped so far-indicates
Microsoft is concerned about widespread failures.

“The numbers suggest they’re either being extremely conservative or it’s one
unit in two, three, four, or five that’s going to fail,” he says.

Microsoft said it will take the charge for the quarter ended June 30, which is
also the end of its fiscal year. The company said the charge will reduce its
earnings per share for the quarter by between seven and eight cents.

Reports of technical problems with the Xbox 360 have dogged Microsoft since it
first introduced the console, but the company has previously denied that the
problems were widespread. Mr. Bach reiterated that “for the first year-plus we
weren’t seeing a meaningful number” of consoles fail. In the last three months
though, he said the company accelerated its testing of hardware and determined
the problems were more serious than it originally thought.[/quote]

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