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

[B3D News]

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.

Read the full news item

 

[Cyan]

That's good, very good news indeed.

We are already discussing this here; http://forum.beyond3d.com/showthread.php?t=42530

Please, merge both threads. I like B3D's style in that regard, it's quite tidy and unique.

Good evening.

 

[Carl B]

LOL, Cyan that's not how it works - the B3D News threads remain, whatever other threads on the topic may be going on. Believe me, it's not my ideal, but these threads are auto-generated when news is posted on the front page.

I appreciate your spirit though!

 

[22psi]

Ban the bot!

 

[Carl B]

This is the best article on the matter out there anyway, so... you guys might as well read it!

 

[Cyan]

LOL, Cyan that's not how it works - the B3D News threads remain, whatever other threads on the topic may be going on. Believe me, it's not my ideal, but these threads are auto-generated when news is posted on the front page.

I appreciate your spirit though!

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.

Btw, seriously, good article about an already good news.

 

[Tap In]

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.

 

[Platon]

I guess this is a very good indicator that the xbox360 failure rate is not what it should be and I really hope it costs them as it seems it is doing and fire whatever beancounters that came with the idea that a big failure rate is after all cheaper than a good built 360...

 

[almighty]

While many 360 owners are rejoicing, Sony must also be celebrating this announcement. With Microsoft confirming hardware issues, and set back a billion dollars, Sony is in a spot of pure advantage. A well planned price drop may give them some more leverage in the console war for this year.

*Update: According to FOX News (10pm TV News Report), an estimated 2.5 million Xbox 360s have been reported defective. This could be the reason behind the 1.1 Billion $ fix and warranty extension.

[url="http://www.n4g.com/industrynews/News-49829.aspx]Link[/url]

 

[Platon]

Link

Would that mean 20-25% defect rate?...

 

[inefficient]

Would that mean 20-25% defect rate?...

More likely FOX just did some brain dead math like $1 Billion USD / $400 console = 2.5 Mil consoles.


1 Billion USD is a huge damn huge chuck of change though. Even if you are a Microsoft. Think of all the better ways they could have spent that in their quest to "win" in the console space. They could have easily dropped the launch price on their console by $100. They could have easily paid off every major publisher to make exclusives just for them.

I fully expect some higher ranking MS execs will get the axe for this. Shareholders will not be happy. Bill Gates will not be happy. Maybe there is still a seat for you at Sega Peter Moore!

Because they said they are still promising shareholders to have a profitable division by 2008. That practically guarantees there will be no price drop for the 360 this year.

 

[Carl B]

It's hard to say where Fox got that number from - I agree it could be as bogus as dividing that $1 billion by $400, but even that wouldn't really give you anything that made sense in terms of their costs. Microsoft has been accounting normally for this issue from launch until now, and likely the pre-existing hit from servicing has been rather significant. This $1 billion is a one-time charge that goes above and beyond the servicing charges that they have already accrued, and simply is the difference between what a one-year warranty has cost them thus far vs what a three-year warranty now costs them.

In terms of any price-cuts though, as written in the article (though not explicitly mentioned) I don't think this will affect any move to cut the price. 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.

 

[BoardBonobo]

But was actually acknowledging that they had such a high defect rate part of their fiscal plan for this year? If they had continued to sweep it under the carpet then they could have made a play for next fiscal year, now they will have to explain to their shareholders how they are $1billion + out.

Also I would expect to be told how they are managing the situation, what steps have been taken to rework the hardware to stop the problem, is the 25% failure rate just one batch of consoles or does it apply to everyone made? Does that mean all current 360's will fail at some point in the near future? And so will the cost of replacing them increase?

I think the next shareholder meeting will be quite electric!

 

[Carl B]

But was actually acknowledging that they had such a high defect rate part of their fiscal plan for this year? If they had continued to sweep it under the carpet then they could have made a play for next fiscal year, now they will have to explain to their shareholders how they are $1billion + out.

Also I would expect to be told how they are managing the situation, what steps have been taken to rework the hardware to stop the problem, is the 25% failure rate just one batch of consoles or does it apply to everyone made? Does that mean all current 360's will fail at some point in the near future? And so will the cost of replacing them increase?

I think the next shareholder meeting will be quite electric!

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. It's a conference call I listened to about four times, and the answers are in the article.

To your two primary questions though, the hardware has been redesigned, and Microsoft views a $1 billion charge in the 4th quarter coupled to profitability in '08 of obvious greater psychological desirability than a situation where they miss their profitability target for next year and continue to suffer a 'slow bleed' due to 360 servicing.

 

[Farid]

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.

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.

 

[Tap In]

.... 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.

 

[jb]

No need for two threads on the same topic...lock one please.

 

[Carl B]

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?

 

[Moonblade]

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

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.

 

[Carl B]

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/sto...x?guid={1D083C7C-A67D-4F7C-92DD-9B8C060542EE}

Like Sony's own official price-related statements though, it's hard to know what's simply smokescreen and what is real intent.