Rings of Red

More (very interesting) info about the $1 billion charge down, showing just how big the problem was:

http://dubiousquality.blogspot.com/2007/07/console-post-of-week-microsoft.html

I've been thinking about the scenario of a full Xbox 360 recall over the last week, and I've come up with one more potential scenario.

A voluntary recall.

Don't want to send in your 360 for replacement? Fine--you still get the three-year warranty, and if it fails, it can be replaced then. If you do want to get it replaced with one of the "newly unshitty" units, though, you contact Microsoft, they check the serial number, and if your unit qualifies, it gets replaced.

The best part of this scheme, for Microsoft, is that they don't have to contact customers--we get the choice, but we also have the responsibility of contacting them.

Plus, if they announced this at, say, the end of January, it wouldn't cut into their holiday sales, and nobody's going to buy a console in February, anyway. If they get flooded with replacement requests in February, it's no big deal.

That seems workable compared to any other scenario I can envision.

The one downside in a profitability sense is if they just wait for consoles to fail, the BOM is steadily moving downward on the unit, so replacing one in June is cheaper than replacing one in February, for example.

As class action suits rain down on Microsoft, I think some kind of recall becomes a more likely possibility. And a voluntary recall would blunt critics quite effectively.

If you want to know some of the potential numbers involved, take a look at this outstanding analysis by DQ reader Skip Key, based on information revealed in the Microsoft conference call:

We know that $1.057B of that operating loss for the quarter was the one-time charge due to the warranty. So without that, the operating loss would have been $142m, which would put them well on the way to profitability, I'd think.

We also got further information on the $1.057b charge. It was about a 50/50 split on charges based on the existing warranty, and forward-looking charges, which they'd already announced. But the interesting thing was that 35% of that number is for 'existing inventory writeoffs'. And one of the analysts asked about that in the q&a section of the webcast. The inventory writeoffs are for returned 360s that can't be refurbed profitably. So that gives us approximately $370m in returned 360s that are essentially going to be junked.

So this gives us a pretty hard baseline for RROD (red ring of death) returns. Let's say that a core 360 without drive, controllers, etc. costs $250-$300. I bet it's less than that, but that's a good round number. So basically you'd be writing off any unit that cost more to refurb than that. At $300/per, that covers 1.23m xboxen. At $250/per, that covers 1.48m 360's. So using these figures somewhere between 10.6% and 12.7% of all shipped 360s were returned under warranty with this problem, junked so badly they couldn't be refurbed. What percentage of all the returns for this is that? Half? If it's half, we're right in the 21-26% return rate that I figured they had, and within spitting distance of the anecdotal 30%.

The main other interesting thing was the forward looking statements. For every other division they were projecting revenue increases for FY08 that varied by 1-2%. IE, they'd project a 12-13% revenue increase. But for the Entertainment division they projected a range of 10-19%, which is huge.

This got brought up in the analyst Q&A. And it was confirmed that the wide range on the guidance was because they didn't want to tip their hand on 360 pricing strategy. So lets take that 9% range and shrink it to 7%. As I figure that, they basically see that 7% range as the difference between different price cuts. 7% of revenues on this year is ~$426m. At this point, I doubt that they do a price cut before Thanksgiving, but I'd be shocked if they don't do one then. If the cut is in November, that leaves 8 months in the fiscal year. My guess is that this $426m range represents a $100 range on possible price cuts, which would imply that they expect to sell about 4.2m units from November through June. So what level of price cuts would give them 500k/month sales? I don't think $50 would do it. $100 might. So this probably represents that they plan to cut between $50-150 or between $100-200 on the price, probably after Halo 3, but before Christmas.

Let's take a closer look. Key points:

--$370 million of the $1.057b charge is for returned units that are just going to be scrapped instead of refurbed.

--I think the $250 BOM estimate is probably closer to correct (at this point) than $300, so the 1.48M (let's just round up to 1.5 million) number is probably the best estimate. So Microsoft is scrapping, potentially, a million and a half units.
--Microsoft gave a wide range on guidance for the Entertainment division so that future action on prices couldn't be divined by the guidance. So they are planning a pricing action, but the range makes it impossible to nail down with any certainly.
--Skip mentioned that a $100 price cut might get the 360 to 500k units a month in sales. I think it might double holiday sales, but expecting a permanent doubling of the weekly sales rate is less likely.

Here's the most interesting part of the analysis, and it's quite fun to speculate here. If the BOM for the 360 now costs $300 (which I think is fairly close), then it means that (Skip's calculation) about 1.25 million units will be scrapped, based on the $375M that's set up for "existing inventory writeoffs."

If the installed base is around 10 million units at this point, that projects to a staggering failure rate. Remember, they're not scrapping all returns, just the ones that can't be refurbished profitably (red ring of death units). Skip notes that even with a very high writeoff rate of 50% of returns, for example, it would mean that the overall failure rate (on a customer basis, not a unit basis) would be at least 25%.

Incredible. That's so far past "nightmare" that it doesn't even slow down as it passes nightmare.
Click to expand...

Do we have an apology from Tap In for saying we were spreading FUD yet? :D
 
Man, I just got the red ring of death on my 360 (bought March 2006). I've been getting more and more dirty disc errors for the last month or so on games that are 100% spotless on the back. The funny thing is that two of my buddies got the ring of death at the same time as I, even though they purchased them months from when I purchased mine. Out of 4 of us that have 360s, 3 of our's now have the error.

Hopefully the x-clamp mod will work because my 360 is out of warranty (I've opened it up before).
 
http://www.xbox-scene.com/xbox1data/sep/EElVVpFpypiYZfrBIm.php
As Microsoft meets with financial analysts today, discussing its prospects in areas including consumer products, one subject clearly on the minds of analysts is the recent $1 billion charge taken by Microsoft from Xbox 360 malfunctions.

Microsoft CEO Steve Ballmer addressed the topic on stage: "We have to learn from our mistakes. It was painful to announce the write-off that we had to announce, and yet we knew we had to take care of our customers," he said. He promised that Microsoft will be "world-class when we do hardware."

It is a little bit late.
 
MS has usually been pretty excellent with hardware, but then that's mainly been keyboards and mice. The Xboxen themselves... (Can't really count the Zune, as that's basically Toshiba. I don't think they home-grow the cams or headsets either, do they?)

Ah well, I suppose they have until 2011 or so, or whenever they launch whatever-they-call the third Xbox.
 
cthellis42 said:
MS has usually been pretty excellent with hardware, but then that's mainly been keyboards and mice. The Xboxen themselves... (Can't really count the Zune, as that's basically Toshiba. I don't think they home-grow the cams or headsets either, do they?)

Ah well, I suppose they have until 2011 or so, or whenever they launch whatever-they-call the third Xbox.
Click to expand...

My friends MS mouse is made by Razor (and the mouse wheel squeaks, lol). Does MS make much of any of their hardware or just rebadge it?
 
Todd33 said:
My friends MS mouse is made by Razor (and the mouse wheel squeaks, lol). Does MS make much of any of their hardware or just rebadge it?
Click to expand...
While the Habu is a cross-branding effort between Microsoft and Razer, it's not like this is precisely common among their hardware, and it's an infinitesimal speck in their overall mouse line through the years, which is--to the best of my knowledge--completely internal. (Along with their keyboards.)

While MS may have acquired a company to BEGIN with... They've been at it for many, many years.
 
Small tidbit from Robbie Bach...

It's a design challenge that we've had to work around and create a new design to solve that problem, and for the interaction of a variety of different components. And so that's a Microsoft design question, not some component manufacturer's problem or our manufacturing partner's problems. It's something we've had to work on. We know we have a much better design in the market now. We verified that.
Click to expand...

http://news.spong.com/article/13321
 
Microsoft Starts Online Site for US Xbox Repairs

This new service lets you register your Xbox or Xbox 360 console, setup a repair, and track the status of the repair, all online. This new site lets you create In-Warranty or Out-of-warranty repairs, and even gives you a $5 discount for Out-of-Warranty repairs.
Click to expand...
[ http://service.xbox.com ] ...
 
the xbox 360 i got in march 2006 just 3 rrod 2 weeks ago. sent it in , box came in 4 days sent it away and complained a little about my Live not being used. they gave me a extra month of Live, if you sound really pissed i heard they somtimes throw in 1600 mspoints.
 
keyn said:
[ http://service.xbox.com ] ...
Click to expand...

It's highly recommended, I have a new/different XBox being shipped to me now. While it'll be a couple weeks that I didn't have this particular 360, I spent only a couple of minutes in submitting the RMA, and then packing it up in the coffin they sent. Luckily I have two 360's.

I will probably call to bitch about the content, it sucks that I have to be logged in now to play some of my TV shows and games.
 
AW0L said:
the xbox 360 i got in march 2006 just 3 rrod 2 weeks ago. sent it in , box came in 4 days sent it away and complained a little about my Live not being used. they gave me a extra month of Live, if you sound really pissed i heard they somtimes throw in 1600 mspoints.
Click to expand...
Heh. My Xbox was gone 3 weeks (for the 5th time) and I made a big stink about it. Escalated it to MS from the callcentre...

They gave me a 1 month Xbox Live subscription card. This is instead of asking for a new Xbox rather than a refurbished (that keeps breaking).
 
Asher said:
They still haven't sent me a replacement Xbox...they received my broken Xbox to their depot two full weeks ago. I've not heard from them, so I've repeatedly called to try to figure out what's going on, but the guy who is handling my case is apparently on vacation and left no other way for me to contact other people at MS about it.

I called the regular 1-800-4MYXBOX but they have no idea since the case is being handled by Microsoft...

So I call the MS Xbox number again and mash buttons to try to get any agent at all (it asks you enter the 4 digit extension number of the agent you've been assigned). I found out hitting * brings you to the "next available agent", but apparently that functionality is broken as I've been on hold for 30m+ each time I've called with no one ever picking up...
Click to expand...

My 6th Xbox 360 got the red rings of death tonight. This is brilliant.

Edit: To their credit, they immediately offered to send me a brand new Xbox 360 (he explicitly said it will not be a used or refurbished console, but brand new, never been used), Fedex instead of Purolator (which will be faster in Canada). They also are sending a bigger box than normal, so I can include the power adapter and cable (it may be damaging the unit, since it's never been replaced).
 
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