Xbox Warranty To Cost $1 Billion, Customer Good Will

An anonymous reader writes "The Financial Times reports that Microsoft will take a charge against profits of more than $1bn as it tries to limit the potential damage to its videogames business from a design flaw in the Xbox 360 games console leading to units failing." It's bigger even than that, though. Early this week the news was about Xbox Live's growth, but since yesterday the headlines have taken a turn. Peter Moore has admitted the company is shy of their goal, some 400,000 units short of the 12 million Xboxes they'd planned to ship. These facts combined have made for some grim questions, including the San Jose Merc's Nooch asking why you'd want to buy an Xbox in the first place.

Well...

If they would've just done a quality job in the first place, they wouldn't have to be spending the money now. They're probably regretting getting the console out fast now

Re:nope

Um, isn't the console still losing money. I read that MS was aiming for Gaming to be profitable in FY08. With an extra billion dollar hole to dig themselves out of, it might take an extra year, or two to get back to even for them.

It's going to take a lot longer than that.

Before this announcement, they were slightly more than $5 billion in the hole on the Xbox and Xbox 360 together. Now they're approximately $6.5 billion in the hole.

That's a huge amount of money. That's like an entire year's worth of MS Office sales (not profit, sales).

What they're talking about in FY08 is profits going forward. But the Xbox program will not be profitable on the whole for many years, if ever. And it won't even be profitable going forward if stuff like this keeps happening.

What I think is 'odd' [which applied to MS means I think they are lying] is that there was no "pattern' to these XBOX 360 failure for 1.5 years, but one finally appeared in the last 0.25 years. This would make sense IF only a limited batch of them were faulty, but MS extended the warrantee for all 360's, and not just for a batch of 360's within a range of serial numbers.

It must be a design flaw, which the article summary got right (this is one of the few sites I've seen with the guts to say it).

Look at it this way. A certain number of units of any piece of electronics are always going to be defective, no way around it. The average is 5%.

MS is now tacitly admitting that their defect rate is well above 5% - for it to cost them $1.3 billion with only 11 million systems out there, the defect rate must in fact be close to 100%. But even if they're counting on fixing some more conservative number of systems - say 30% - that's still well above the industry average. However you look at it, they're admitting to an "unacceptable" number of defective units, and that can only happen if there's something about the design that's causing it to happen.

What that means is that all Xbox 360's are at risk. It doesn't matter when you got yours; it has RROD potential today, tomorrow, and every day after that. That's the case because all 360's are designed the same way - there hasn't yet been a significant change.

I am curious to see what the 360's made after this announcement look like, side by side with a pre-announcement system. If there is no change, then I think it's safe to say the flaw still exists - and I sure wouldn't buy such a system. If there *is* a change, though, then I think we'll have a clearer idea of what the flaw was... but it'll still take time to know whether or not the fix was effective.

Either way, I'd put off buying a system for at least six months at this point. Let the old units work their way through the system, wait for the new units to prove themselves.

Re:nope

What that means is that all Xbox 360's are at risk. It doesn't matter when you got yours; it has RROD potential today, tomorrow, and every day after that. That's the case because all 360's are designed the same way - there hasn't yet been a significant change.

I am curious to see what the 360's made after this announcement look like, side by side with a pre-announcement system. If there is no change, then I think it's safe to say the flaw still exists - and I sure wouldn't buy such a system. If there *is* a change, though, then I think we'll have a clearer idea of what the flaw was... but it'll still take time to know whether or not the fix was effective.

Either way, I'd put off buying a system for at least six months at this point. Let the old units work their way through the system, wait for the new units to prove themselves.

No one seems to be connecting the dots between this and the articles a month or two back saying that returned 360s were coming back with very different heat sinks inside them. There were some even bigger problems with the 360s sold right around launch - my guess is that MS thought they had already fixed the problem and it took them a while to realize they really didn't. So perhaps a few months ago they acted on this, came up with a fix, started applying the fix to units they repaired (and perhaps new units) and once they were satisfied they had fixed the issue they announced this - knowing that the size of the hit is limited to some percentage of 360s already out there and that new units (and repaired units) are not going to have this high failure rate.

Re:Well...

Just saw an interview with Robbie Bach, president of the entertainment division of MS, on CNBC. Even though the original sales estimate was 13-15 million units, they are not going to meet the downgraded target of 12 million units; 11.6 million seems to be the upper estimate.

Bach did not deny the warranty costs; however, he countered that the number of games per console for Xbox was higher than for any other system, and that even though MS is projected to lose another $315 million this year, he insists the system will be profitable "next year".

Meanwhile, on a personal note, my daughters (10 and 13) got a Wii system last week. They couldn't be happier, and frankly, neither could I. The system is quite amazing to use, and the games are not the "bang bang kill kill" stuff that seem to permeate the Xbox/PS3 world. And, while picking up a copy of Super Mario party pack at Wal-Mart Wednesday, four people approached the clerk asking if there were any Wii systems available. "No", "No", "No", and "No" were her replies. Meanwhile, stacks of Xbox's and PS-3's teetered ominously in the background..

Good move

I'm not a Microsoft fan - not by a longshot (I've never - NEVER - used Windows at home. Went from DOS to OS/2 to Mac OS X. But I digress...)

Anyway, this is a great decision on their part. It's nice to see that they acknowledge the problem and are willing to stand behind their product. Nothing negative about that. And they're going to reimburse people who've previously had the repairs done.

This is a good thing, and I'll applaud them for doing the Right Thing (tm).

Not that I'd buy an XBox (hell, all I have in the house is an Intellivision and a Dreamcast...), but it's still good to see them do what's right.

If only...

If only releasing faulty software would cost them $1billion each time. Ah, I can dream...

Why Buy A 360?

I'm going to have to respectfully disagree with Nooch here. That's a really extreme viewpoint to take. Yes, these technical issues are pretty bad; I myself have returned my 360, though I only had to do it once before I got one that seems solid.

That said, dismissing an entire console because of technical issues is pretty crass to me. Not only have there been several wholly worthwhile titles released for the system already (Crackdown, Overlord, plus tons of multi-system releases), but this summer, fall and next spring bear an avalanche of awesomeness. Bioshock, Mass Effect, that Halo thing, Two Worlds ...

I guess I understand where he's coming from, but I feel reluctant to dismiss great games so casually. Ultimately, it all comes down to the games, and the 360 has some really great offerings.

Re:Why Buy A 360?

Yeah, good point, Zonk. I just hate when people are sensationalistic and biased about reporting gaming news. I'm glad you're doing your part to keep that kind of thing from happening.

It's all about the games

And in 5 years, you won't be able to play these games anymore because your 360 is dead, and Microsoft either leaves the console market or releases the 720 with broken backwards compatibility.

Obvious answers

Peter Moore has admitted the company is shy of their goal, some 400,000 units short of the 12 million Xboxes they'd planned to ship. These facts combined have made for some grim questions ...

Unless my maths are wrong, they're 3% shy of their target. Which doesn't seem to be too shabby.

... including the San Jose Merc's Nooch asking why you'd want to buy an Xbox in the first place.

Ummm, because the Wii hasn't got the graphics capability of the XBox? The PS3 and the Wii combined don't have the half of the games portfolio that the Xbox has? That the online gaming for the Xbox is way ahead of the other consoles? That the PS3 costs double that of the Xbox?

I don't own any console but this whole piece just seems to be pointless Xbox bashing to me.

Costing customer good will?

MS may be late to acknowledge the issue - no later than I'd expect any major corp to be, but late regardless - but if retroactively extending the 90-day warranty to three years isn't a move to earn customer good will, I don't know what they could do that would.

I mean, aside from shipping free 360s to every gamer on the planet...which seems a little unreasonable.

I'm not one to throw out accusations of spin too often, but trying to present this as some sort of disrespect, slam, or screw job by MS seems a little unwarranted.

Good will

Somebody doesn't understand what "good will" means. By voluntarily admitting to problems and accepting returns/recalls, they are increasing good will towards themselves. Not admitting to a problem hurts goodwill. I'm not buying an XBox 360 because I don't like them, but I wouldn't not buy one because of this recall/warranty stuff.

Crap - have to eat crow

I'll be the first to say I under estimated the xbox 360 failure rate and will go eat some crow during lunch. When I am wrong I am wrong.

So I wonder how MS will fix this? Yes they will fix the design flaw but I think their only next move is too replace all the 360s out there. Upgrade each unit by the next step up (core users gets premium , premium users get elite, and elite get a free game + a fixed unit).

I am also curious to know if this move will bring a class action lawsuit against MS (I'm guessing yes) and if those with one can simply say I am returning this for full refund even if its 1 year later because it's a known design issue. Could I call up my credit card company and say the product I was sold was a lemon I want to reverse charges to *Insert where bought here*, etc.

Now the Nooch article is just a troll. Why would anyone want the 360. Games buddy. Seriously he points to the ps3 as much better but doesn't offer a bench mark to compare them. Based on games alone (right now) the 360 wins. Want a built in blu ray then the ps3 wins.

Either way MS is in some crap for this one. My 360 has not given me one issue yet this pisses me off.

Customer goodwill?

Ok. Someone explain to me why this is going to COST MS goodwill. I purchased my Sony laptop explicitly because they were offering returns on their batteries based on a few isolated incidents (not sure if this was legally mandated). That shows that Sony wanted to pretend to do the right thing for the customer which benefits me in the long run. It makes perfect sense to buy an XBox360 if you thought that the price was right before the warranty announcement and fanbois are probably going to be happy about the warranty. Regardless of the high percentage of problems, most customers - >50% - still have a working system and if they do not, eventually will - for 3 years. If your PS3 dies after 15 months, you suck on it. Eventually, all that matters is the image and how much you think they will do in the future to keep that image up. And I think this is a + for MS in my book.

This is Dr. Evil's doing

"Hello? Microsoft? I have had one of our agents place a flaw in your Xbox 360 video game system. It is a simple flaw, easily fixed, but only if you know what it is. I shall give you this information if you give me ONE MILLION... What was that? Oh, really? That's good to know, thanks. (ahem) I shall give you this information if you give me ONE BIIIIIIIIIILLLLLLLLLLION DOLLARS! Muhahahahahaaaaa!"

What again?

I'm not a Microsoft fanboy.... and I likely wouldn't buy an XBOX on principle.... but isn't this headline a bit inflammatory?

So Microsoft's sales projections are off 400,000 units on 12 million, suddenly the world seems less bright? They've made bucketloads of money (although the warranty extension might cause some trouble). The negative editorial linked in the article seems light on reasoning and heavy on opinion, but does all of this really warrant grim questions? It's not like the console or Microsoft is going to go under because they had to extend the warranty on the hardware. It's not like this thing is the Phantom or NeoGeo or something.

Re:What again?

They've made bucketloads of money

That's the point. They haven't. The whole console branch is a loss leader. Less consoles means less games sold means less of the only part of the console business where there is actual profit potential.

Yes, it's a major problem, especially for a company that is very used to exceeding their goals.

Re:What again?

Just wanted to back you up with some figures on how little of an success that Microsofts Home and Entertainment division is so far (products in the division is Xbox 360; Xbox; Xbox Live; CPxG (consumer software and hardware products); and IPTV).

The total operating loss for that division for the years 2004 to 2006 is $3.084 billion (yes $3084 million) on a total revenue that was, for those years, $10.133 billion. So they have to turn that divsions average 30% operating loss into a profit and try to recoup those $3 billion. That will not be easy.

Source Microsofts 10-K filed with the SEC:http://microsoft.shareholder.com/redesign/Edga rDetail.asp?CIK=789019&FID=1193125-06-180008&SID=0 6-00 [shareholder.com]

Costing Customer Good will?

I'm not terribly sure about that. Most people who were formerly mad at Microsoft will be mollified by the fact that they at least stepped up and admitted an error, no matter how long it took them to actually do so and that the money (if not the time) is being refunded. People, in general, are generally fairly tolerant of people who make mistakes when they A) acknowledge them and B) make amends for any injury caused. Microsoft is doing both, so I'm fairly sure that will build customer goodwill in the long-term. The people who look down on them for this were probably the people who would do so regardless, so why bother attempting to please people who aren't interested in being pleased? As far as "grim news" about the shortfall in 360 sales....a 4% shortfall? That's what 400,000 units of 12 million equates to. This is "grim"? What's Sony's shortfall on the PS3 at the moment? We won't mention Nintendo of course as they've been a runaway success by any standards. While I'm personally greatly annoyed by my 360 with the way it's clearly malfunctioning (play a game longer than an hour or two and I run the risk of the disc magically becoming "unreadable") but not badly enough to get it repaired under warranty, I still enjoy the platform. I do have to question some of the rather sensationalist headlines on this story though.

Skip it

including the San Jose Merc's Nooch asking why you'd want to buy an Xbox in the first place.

Yea, I went there and the article title read with huge letters: "XBOX 360 - just skip it"

I wasn't very sure if he means skip the console, or skip the article, so I skipped the article.

Don't worry about tech issues

My 360 went bad, but the return process MS has setup is so painless and quick (same week deliver and return), it didn't bother me. My Wii and 360 together cover all assets of console gaming, and I love them both. I would get a PS3, but all the good games for it are also out on the 360, so I don't see a reason yet. I can see how all the news of tech problems could deter someone from getting one, but if they are mild to high level console player, they are really missing out.

Such Bullshit

Never had any trouble with the PS2, yeah right. I've had the same disc read errors with that that you eventually get on any machine.

Anyway, what is the reason you buy any console? It's the games. I don't buy a console to play music, watch video, or IM. I buy one because I want to play the new high end games and I cannot afford the bleeding edge of high-end PC gaming. Yeah, the Wii is fun for minigames, but not even in the same league as PCs, 360, or PS3. To suggest that it is an alternative to them is totally bogus. I have a Wii that is a lot of fun with company, but not much fun otherwise. It has weak graphics, and it's games by and large have very little depth. It provides a gaming exerience much different than that of the other consoles. For those that want graphics, depth, and powerful AI, the Wii is no substitute.

Why buy a 360? Once again, it's the games, and the cost. Want to play Halo 3, you're going to need a 360, or ruin your powerful PC with Vista. That's a no-brainer. Want to play Dead Rising, Ace Combat 6, Gears of War, Mass Effect, Forza 2, Bioshock, etc.? You're gonna need a 360 for most of them, or PC with a graphics card that costs more than a 360.

The PS3 seems to have plenty of power, but no games to really take advantage of it. Oblivion is the best game the PS3 has, and it plays just as well on the Xbox, and even better on the PC. Other than that, the PS3 has a long list of lackluster titles. With better titles, the PS3 would be a better system, but it keeps missing out on exclusives that really hurt it.

Finally, you have online service and achievement points. Being able to see all your friends on and invite them into a game while they are watching a movie or playing another game is pretty cool, as well are the game demos and extra content you find on Xbox Live. And although you would think those achievement points are just a gimic, and they are, they are a very compelling one.

The 360 has the games and online. Until PS3 can at least come up with some good games, it is a high-priced movie player. If you can afford PC gaming at that level, neither console is appealing.

What else does it take??

How can admitting a problem, offering to fix and offering a warranty extension longer than any other console hurt their good will? If anything I believe it will get some that were on the fence about the 360 to buy one now.

Why buy a 360? A great library of games far better than the competition and a price that far lower (please dont argue the symantecs of a bluray player that most of us dont care about, im not buying the hd-addon for the 360 either).

so far most games just look better. Look at the EA sports offerings this year, the 360 versions look sharper and run at 60 frames a second, the ps3 versions run at 30. Supposedly that due to the learning curve of programming to the cel processor. Fanboys will argue that once they figure that out games wil blow the competition away, but every console has eeked out better graphics and performance over the course of its life, another year of figuring out the cel is another year or tweaking with the 360's processors as well.

Re:What else does it take??

Because to do so, they have to admit that they were denying the problem in the first place. There were shops that were refusing returns and telling the customers to go directly to MS for repair because MS wouldn't take any more returns from the shop, stating they didn't believe there could be that many bad consoles.

That's good customer service, yeah!

So as a consumer, how should I see this?

A) No worries, it won't happen to me!
B) It's okay, I'll only be without my console for a week to a month or so.
C) Microsoft only admits problems once the become a PR nightmare. If I buy their next product, I'd best be sure to wait until it's stable.

People are -already- doing C with their software products. 'Wait for SP1 before you buy Vista.' etc. MS even recently told people NOT to do that specifically, admitting that it's a known action people are taking.

How much more will it take before people just start referring to MS as the 'wait before you buy' company?

No, there's plenty of 'customer good will' lost here. The only way to engender good will is to be proactive, no reactive. (ie: Don't wait for 1/3 of your customers to complain before believing them.)

Hopefully

This means that next genreration there will be an affordable PS4- which would be very competitive, a reliable Xbox 3, which would be very competitive, and a wii2 that actually has better hardware than my stapler, which combined with its ability of taking advantage of hardware would be very competitve.

12 million?

Is that 12 million 360s, one per customer? Or does it include sending replacements to people under warranty?

Twiddling the numbers?

short of the 12 million Xboxes they'd planned to ship

Hey Microsoft, it doesn't count if you're shipping to the same gamer who's had his break 10 times.

400K

They missed predictions by only 3%? In some quarters that gets you a book deal and a show on MSNBC.

Duh. Der. D'oh.

San Jose Merc's Nooch asking why you'd want to buy an Xbox in the first place.

Uh, because of piles of great games, both present and upcoming? Is this so difficult to understand? Are journalists rerally as dense as they seem to be? It's the games, games, games. Just started Overlord, and haven't laughed so much at a game since Psychonauts.

Some of us look at game consoles as entertainment and not as a religion where holy wars must be waged against the other consoles. If the Wii and PS3 get enough exclusive games I want, I'll get them as well.

Profits. . .

Um, is anyone else wondering how the 360 will ever profit given how much money the XBox project has already burned? I would never buy a product which wasn't designed to make money off of me because any alterior motive for a company to give me a product I don't trust. How many thousands of dollars has Microsoft spent on each XBox/360 owner? It's like a rich dork courting an amazing girl - throwing money all over the place for her and not giving a shit that she's using him for $$$. How does this benefit the rich dork? He makes her depend on him and marry him and write a prenumpt to keep her around.

Now more than ever the Microsoft assimilation jokes should be going on but apparently everyone's okay with Microsoft being devious as long as it's in the name of Halo. You don't burn money like they are without the goal of monopolization. Microsoft has done nothing but exploit the weaknesses of capitalism and the people who are aware of it aren't nearly as vocal as they should be. This is why they have their Windows monopoly, their Office monopoly, and why they have a chance of monopolizing "home entertainment." It's because the Slashdot geeks who are supposed to be boycotting this shit and supporting non-evil (yeah, I said evil) alternatives are too busy playing Halo on their 360 or Half-Life on the Windows PC.

It doesn't piss me off when Joe-Shmoe-I-don't-know-a-HardDrive-from-HighDefini tion buys a Microsoft product because he's an uniformed consumer. It pisses me off when someone who knows how fucked up Microsoft is buys their products anyway. You make assimilation jokes then jack yourselves in.

I have thought about buying one..but can't.

If I am going to bother to buy one I want the best one available (I guess that marketing might have worked) so I want an elite unit. However there are none to be found. Now I hear they are going to be luanching the Elite in Japan. How about getting the home shores back filled before branching out!

It did cost them good will...

Adding a warranty program this late in the game does hurt them, at least a little:

1) Denial that there is a problem is no longer an option. There is a problem, and it isn't small or isolated. It is significant enough to cost MS billions of dollars.

2) Everyone who stood up and agreed with MS that there was no problem is now outed as being wrong. Not that this a HUGE deal, but lets wait and see if those same folks stand up for them again any time soon.

3) They face stiff competition from two other console vendors that aren't having these types of problems. And lets face it, everyone has only one favorite console. Xbox360 is likely to have lost that spot on more than a few gamers' lists.

it's about MS pretending to show a profit for xbox

doesn't this allow them to effectively eliminate all support and product service costs for the next 2 years? They've added 2 years onto the already extended original 90 contract and they claim the Xbox will be one of their first profitable products in 20 years(outside of MS Windows desktopOS/serverOS and MS Office. It was stated, by Microsoft, that they still believe the Xbox will make its first profits in the fiscal year 2008. Not having to pay for service or suppport for two years has got to help boost the likelyhood of this actually happening.

And timing is everything. They announced/enacted this so they could move the future expenses into losses for the fiscal year 2007 which just ended. Nice work shuffling the deck Microsoft. Now we'll see how many you've actually fooled.

LoB
 

Not all as it seems

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.

This is the important part of the press release. If you're xbox fails for any reason that isn't the three red lights of death, then no, you don't have the 3 year warranty. Take for instance, my xbox: On day one, I plug it in, and there's a problem with the a/v connector which results in four red flashing lights. I'm only covered by microsoft's warranty for ONE year. Not three.

They plan on everyone buying them

And they want the console to last on the market for at least the next three years. Both sony and microsoft are thinking ahead to the next generation of platforms already. Don't believe me? Look at who get snatched up at TED conferences, gaming expos. Microsoft wants everyone to buy an Xbox 360 even if it costs them twice over. They just want your marketshare. BTW- it's a problem with the GPU. Every so often it hardlocks. Doing testing, I locked about a box a month. They had a fat stack of burned out devkits, just waiting to be sent back. They don't care what it takes- they just want one in every house.

Who cares about the freaking brand?

I didn't buy an xbox 360 because I'm a fan of xboxes or microsoft and somehow hate everything else, I bought it because I took a good look at the upcomming games for all consoles and the one to carry the most that I wanted to play was the xbox 360. Some of those games are comming for pc or ps3 aswell, but some like Mass Effect aren't (in a good long while anyways) and there is something to be said about sitting in your comfy couch playing with a nice controller. But if any of those games I favor were comming out for the ps3 and not the xbox 360 I'd have gotten that instead. Those brand doomsayers and fanboys should get a grib on themselves and reality if you ask me, all the freaking brands exist solely to cash in on us and why on earth do you want to be a fan of that?

Microsoft went too cheap this time and now they have to make amends, but so what? It's not like Sony or Nintendo couldn't be the next in line for that since they all do things like it if they believe they can get away with it and still have happy customers.

They lost me

I was an extremely vocal evangelist for xbox -- I convinced 3 other people to buy one as well. Silly me: two of those recommended boxes failed; the other one is never used.

As for me, I remained a (less-vocal) fan after my second box failed. Now that I'm waiting for the return of the third, I've given up. It'll stay under my TV, and why not? I paid for it, so there you go. And I'll probably buy Halo 3. Bioshock looks good. But it won't be the centerpiece of my entertainment center like I planned it to be. Those bastards owned *my* living room, and now I'm taking it back. "Failure rates normal." "Vast majority are enjoying their boxes." They've been taking a shit on my head, and for a year and a half I've been saying thanks for the hat. Well, no more.

Oh, and BTW, to everybody that says "repair turnaround in a week, what's the big deal?" I say, that was a long time ago, before everybody's died. Mine's been gone a month, and support will now tell you to expect a SIX WORKING WEEK TURNAROUND.

Hey, everybody, don't listen to me, though. They've fixed the problem. They've owned up to it. Feel confident "Jumping in."

Thanks for the hat, you a**wipes.