A History of the Xbox Red Ring of Death Fiasco

VentureBeat has a lengthy story about the situation surrounding the Xbox 360's "Red Ring of Death." It starts with the developmental phases for the 360, looks at the marketing decisions that drove Microsoft to aim for a release ahead of the PS3, and talks with sources and engineers within Microsoft about what could have been done to prevent the problems. Quoting: "Leading up to the launch in the fall of 2005, the number of defective units would soon grow to tens of thousands. Any other consumer electronics company would likely have postponed a launch with such low yields. But Microsoft had more money in the bank than anyone else. The decision this time would fall to Bach and Moore. The costs of launching with low yields -- where you take big losses on every product sold -- could bankrupt other companies. But Microsoft could afford to do so. Microsoft did delay the launch date from October until November. But some inside the company still believed returns would be out of control."

Dumping? Loss leader?

I'd appreciate it very much if someone could please explain to me, how is it possible that one company sells something at a loss and it's called "dumping" (which you can get in trouble for, IIUC), and another company sells something at a loss and it's called a "loss leader?" Wtf? It's especially clear in this case, when you have orange rings of death and whatnot, that the purpose is to bankrupt the competition by selling yours for less. By the time someone spent their Christmas money on one product, they won't buy the other. Hence, dumping.

Re:

Have you tried Googling the word "dumping"? Because the first link explains it.

Re:Dumping? Loss leader?

Another alternative term to "dumping" is explained, in much greater depth, by googling "2girls1cup".

Re:Dumping? Loss leader?

As I understand it, the difference is that a loss leader can legitimately expect to make money indirectly from the sales. Walmart can afford to sell its most popular items at a loss so that other items can be sold for a profit. Microsoft does this with the XBox, where they sell the XBox in an attempt to get more sales for their software.

Dumping, on the other hand, is selling at a loss so that you can drive the other company out of business and then raise the price of that same item.

Re:Dumping? Loss leader?

"If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be "dumping" the product." --from Wikipedia [wikipedia.org]

"A loss leader...is a product sold at a low price to stimulate other, profitable sales." --from Wikipedia [wikipedia.org]

The XBOX is a loss leader because people will buy it at its cheap price, then people will want to play the XBOX. Those people will be required to buy games. The games are high margin products. Microsoft makes both so it's all good for them. It's just like with printers and ink or razors and blades. Microsoft would be guilty of dumping the XBOX if they sold the XBOX in say Europe for 20 USD, which I don't think they do.

Re:Dumping? Loss leader?

You do realize that Microsoft, Sony, and Nintendo all receive a licensing fee or percentage from every game sold, yes? While they may make more money off 1st party games, 3rd party games still bring in a nice chunk of change as well.

You also might want to check the stories of each system when they first came out. There are plenty of indicators that both X-Boxes and at least the last two PlayStations were sold at a loss, and if not a loss, then a very minimal profit margin. Nintendo is the only system maker to consistently release systems at a healthy profit. Not a loss, nor anywhere near the break-even point, but a decent enough profit that they have some very fat stacks of cash on hand.

Re:Dumping? Loss leader?

I'll explain the difference, Dumping is when a company sells a product below cost to bankrupt their competitors.

Loss leaders are when a store sells a product below what they pay to draw in consumers and get sales.

Clearly the video game industry is rife with corruption and 'Dumping' primarily because hardware makers can subsidize the price of a console with license fees from game developers.

depend on 'dumpers' like Microsoft to have some very complex bookwork, and possibly some Chinese shell corporations to sell high priced parts significantly below cost, but only to Microsoft.

there are lots of ways electronics can be sold below price, specifically cell phones and satellite TV boxes, which come with service agreements. but in the cell phone market, you're not locked into a single phone, although each cell provider has their own line of phones... most big players have models for each provider, except in cases where they get more money to be 'exclusive' to AT&T (like the iphone) etc.

some of this stuff is illegal in many places, but as i said shell corporations are shady and hard to stop. because billionaires often engage in venture capitalism, it's not hard to 'invest' in a shell corporation that's going to go into an exclusive contract to say, sell 40 million $40 dollar parts at $1 a part, and have the initial VC funding of say 40 million dollars, while 'your buddy' makes a cool million cash etc... then let the company go belly up, or keep using the same shell corporation with additional rounds of VC funding...

Dumping versus loss leaders

I'd appreciate it very much if someone could please explain to me, how is it possible that one company sells something at a loss and it's called "dumping" (which you can get in trouble for, IIUC), and another company sells something at a loss and it's called a "loss leader?"

Dumping [wikipedia.org] is a form of predatory pricing [wikipedia.org] under international trade law whereby a product is sold below cost or below market value in the country of origin. Economists sometimes take a more general definition of dumping to mean any kind of predatory pricing but in my experience this is a less common usage. Dumping often occurs when a producer has excess capacity beyond what their home market can absorb so they sell the excess in a different market either to damage current/potential competitors or to gain market share.

A loss leader [wikipedia.org] is basically a sales promotion. One product is sold cheaply (possibly below cost) with the expectation, but normally not the requirement, that customers will be enticed into buying additional more profitable product(s). The most famous version is the razors and blade model pioneered by Gillette.

The important difference is that a loss leader isn't necessarily destructive. With dumping there is no attempt at profitability, at least not in the short term. However predatory pricing in general, including dumping, can be very hard to prove. It's quite rare to have clear evidence that dumping is occurring. Furthermore in some countries (notably China) it's not unusual for the government to hold stakes in manufacturing firms. Naturally it is rather difficult subpoenaing records from a state owned Chinese manufacturer so you can sue them for dumping.

Re:Dumping? Loss leader?

i don't think that is what's usually meant by 'dumping'.

although it does seem to primarily refer to predatory pricing in the context of international trade, it's not when you sell something cheaper in one country than in another. it's simply when a product manufactured in one country is being exported to another country at a price below cost or below the market value in its home market.

as with most forms of predatory capitalism, its legality is fuzzy and often what one nation preaches is not what it practices--particularly western nations which like to tout the virtues of "Free Market" capitalism, such as the U.S.

so if a U.S. corporation wanted to dump products on another nation, they would condemn any protectionist policies which might oppose these actions. but simultaneously, if another country wanted to dump products in the U.S. which competed with domestic industries with powerful lobbies, antidumping petitions would be filed with the Dept. of Commerce.

things like 'fair value', or the difference between 'dumping' and selling a 'loss leader', are entirely subjective. they're simply used in whatever way most benefits a given group.

Interesting timing

I wonder at the timing of a Xbox-critical article on the exact day the latest price cut hits, bringing the Arcade version under the price of the Wii.

The first two questions to ask about any news story:
Why am I hearing about this, and why now?

It's amazing how much is revealed by these 2 questions.

Proof that MS bought its way into this market

We've seen it time and time again, how Microsoft can afford to buy it's way into a market segment. I wonder if it will pay off in the long run, because it seems they've hit a saturation point with this product they have. Not much growth over the last product revision, and barely making a penny in the last few quarters (let's not talk about making up for all the loses to date yet).

With the stock price stagnant, how long can upper management convince shareholders that this is the right thing to do?

Good thing they're not getting away with it!

Thankfully the average consumer is well-enough informed to boycott such a deeply-flawed product, thus preventing Microsoft from profiting off of this business model! I mean, can you imagine if they were selling millions of 360s, taking broken units back, and still making money?

more money than sense

MS just seems like the typical firm with money than sense, like the family who will come into a lot of money, then put a a statue that pees water by the pool.

For instance, it can't be that difficult to design an OS that works. Linux has done the basics, and it is free. Apple has done the GUI, with much less money than MS. Yet the best MS can do is a spend millions of dollars on pointless commercials. Is this because it has no idea how to fix the software? Is there no way to invest the 77% profit margin in making working products. Does it all have to spent on yachts.

And it is not rocket science to design a game console. We have had generations of them that worked very well. MS just jumped in and borrowed existing tech, then used the windows 77% percent profit margin to subsidize the costs. And the xBox 360 is the second generation product.

Of course, we must acknowledge that MS tried to design custom hardware, a task for which it has no experience. This leads to the question of why it couldn't just pay for someone to do it right. Oh yeah, the yachts.

People like to compare IBM to MS, and see MS slowing down, but then ultimately being successful like IBM. What people fail to realize is that IBM spent the money to make rock solid products. The Selectric was a damn near perfect machine. The big iron did their job. The IBM PC was bulletproof. I don't know how MS is going come out the other side of the desktop monopoly when Google moves all the customers to the clouds with a six nines failure rate, and MS is still living in a world where a four nines failure rate is acceptable.

Great mis-statement in article

FTFA: "Microsoft has still sold more Xbox 360 consoles than Sony to date."

Damn, I never saw that coming!!!

It's called Hubris

Microsoft's problem is pretty simple, hubris. It's illustrated quite well when you look at the kind of management practices taken by Ballmer and to a lesser extent Gates.

Microsoft has been so enamored of their own success that they believe that they cannot go wrong, simply because of who they are. They are also more than willing to pursue business with the kinds of principles and ethics that you'd expect from a used car salesperson. They really don't care what the customer experience is, they care about making money and believe that no matter what they do, they will succeed regardless.

Well to some extent that's true, or was true in the past, as mass and momentum are real. However it's also very clear that eventually momentum decreases and customer loyalty is a fickle thing. MS is already seeing the fruits of their poor judgement. Apple is selling more Mac's than ever, and I'd argue that Vista has played a big part in that success. I for one don't own an Xbox 360, I own a PS3. I probably won't ever buy a 360.

I'm sure Microsoft will recover, but to what extent remains to be seen. But unless they change their principles and work toward attracting the kind of loyalty through quality and connecting with your customers that Apple has enjoyed they will continue to see, if nothing else, a customer base that will be willing to jump ship at the first opportunity.

Nothing really new, except...

But some inside the company still believed returns would be out of control

I usually wait 6-12 months after a console is released before I purchase it so that I can get one with a working mod-chip from Canada. I'll be damned if Sony, Microsoft, or Nintendo are going to tell me I cannot play backups. Yes, Backups. So I had nearly a year to watch this infamous shit storm start, and not become a victim.

The problems with the console were known fairly early by pretty much everyone. People talk. Kids talk even more, and most times you cannot shut them up. After about 6-8 months I myself heard about RROD constantly from people. Microsoft really "screwed the pooch" on this one and AFAIK, the losses on the returns have been at least 1.9 billion. That is a staggering number.

The only thing new about this is that there were people in Microsoft that knew they had quality problems, and yet made a business decision to push forwards anyways. The only word for that is hubris. That is what really amazes me.

Microsoft's top game executive, Robbie Bach, president of the Entertainment & Devices group, said at a dinner in July that Microsoft's own research shows that gamers have largely forgiven the company for defective Xbox 360s.

That is awesomely full of shit. It says that he is an executive though, so I am not surprised.

The WHOLE reason I have still not purchased a XBOX360 is the Red Ring Of Death fiasco. It has to be the most unreliable product put forth in decades, probably since the Ford Pinto. I am not a fanboy and I own both a PS2 and a XBOX. I would really like to get a XBOX360, but to this day I cannot be assured that it will not fail within 6 months.

I bet that the "gamers" polled in that little research project were ALL under 14 years old. Of course they "forgave" Microsoft. They're kids! Try asking their parents if they can receive forgiveness. I bet there would be a different story entirely as shipping costs are not free. The time and hassle on the phone to get it taken care of takes its toll.

Forgiveness? That's a riot. Nobody that had to pay for that console is going to forgive or forget about this for a long long time. This WAS Microsoft's version of the Ford Pinto, even more so than Vista. That is saying something too.

Not surpising that Xbox 1 -a PC- had great yields

TFA says that that Xbox 1 has 90% yields from start to finish. How surprising is that? MS simply built a practically industry standard PC. It had a hard drive, an Intel processor, an NVIDIA chip, a DVD-ROM and a power supply. These components were so standard, time tested, and widespread that combining these components into a machine with high yields was child's play. Add to that, the fact that MS was willing to hemorrhage cash with some presumably going towards for build quality on each unit sold, and it's no wonder the Xbox 1 was reliable. What's more, the PCBs and heat sinks had plenty of open air around then to encourage heat dissipation and removal through the fan at the rear.

Many people complain about how incredibly hot their electronic devices become during use, and laptops get the most complaints. Why? Because everything is packed into a nearly air-tight space, hampering heat removal. The 360 designers sabotaged the 360's reliability by building a small and sexy machine that can't dissipate heat from the internal components fast enough to keep the running reliably.

The 360 designers dug themselves a deeper hole by rushing unique hardware elements, in contrast to the Xbox 1, which had industry standard components. Intel had its Celeron's for the Xbox 1s "dialed in" at its factories: yields should have been in the nineties. Likewise, the SDRAM chips were industry-standard, along with the DVD drives. As far as I know, the NVIDIA GPU was neither new nor groundbreaking. Microsoft commissioned IBM to build a custom chip--who's IP would be owned by MS, so no skin off of IBM's nose if the custom processor failed due to MS's unrealistic usage in production--based on a fledgling microprocessor technology. This was a big risk that hasn't paid off because the 360s physical dimensions seem to belie an overly optimistic idea of heat production from the CPU. With the Xbox 1, any veteran engineer could say, "Look, here's a Celeron, here's its heat production, we NEED a heat sink of such and such size, we need open space around it, and this much airflow." With the custom 360 CPU, engineers may have been afraid to speak up about the thermal requirements because the CPU was so new and unfamiliar. Then, there's the ATI GPU, again custom. MS went ahead and crammed it into the system while telling themselves it wouldn't overheat, would perform admirably, and, if not, they could make it work reliably. Well, they should have been more cautious and properly spec'ed and tested the GPU. After taking the time to test and establish the GPU's operating conditions, only then should they they begun design on a case that would be small and still allow adequate heat dissipation.

In the end, the Xbox 1 was a great console because of three things: one, MS didn't innovate: they simply built a Wintel PC based on reliable, time-tested, industry standard components. Two, MS used its position in the software market to cover its losses for producing a high-powered, high quality PC. Three, MS built the Xbox 1 with more regard for function than form. The case was huge, but was great for thermal management.

Re:Cue Apple Apologists

clearly you are new here.

Re:Microsoft's Failure In The Console Market

"now with the 360 they have taken on the reputation of having created the worst console in the history of gaming."

Can't say I agree with that. In terms of defect rate, absolutely. But if you have a working 360, it does a lot of things well.

Re:Microsoft's Failure In The Console Market

"It would, however, be interesting if XBOX dropped out and left only Sony and Nintendo."

Everyone should be thanking MS for jumping into the console market. Whether you like the XBox or not, the competition has made the market better.

Bash MS all you want, but they introduced more versatility in the XBox than Sony did with the PS2 (ie. harddrive, online multiplayer, custom soundtracks). Sony had a virtual monopoly in the console market and MS forced them to work harder. That only benefits the consumer.

Sure MS has lost a ton of money breaking into this market. Did anyone actually think it would be easy wrestling market share from a monopoly??? (If it were, Linux would have a much larger share of the PC platform. Yeah, yeah...mod me down. I'm writing this from a "Hardy" box.)

The RRoD is a serious goof by MS. Still, they have made great strides in establishing a position in the market considering this is their 2nd gen. and they are just now getting some of the franchise titles that were previously exclusive to Sony. Not to mention the benefit of having the enormous library of games Sony built up with the PS and PS2.

Whether you prefer the 360 or the PS3, you should want MS to stay in this market for the long haul. The competition will only improve the consumers experience.

Re:+1 yes I am a sony/apple fanboy.

I do not want to host family parties (nor play mario #122 or other kiddie games)

First off: Mario is not a "kiddie" game. It's a platformer, but that doesn't make it childish.

Second: Zelda, Smash Bros, Super Paper Mario, Metroid Prime 3, and Mario Kart are kiddie games? Damn, why didn't someone tell me?

Are you one of those gamers who defines "kiddie" to be "doesn't include lots of gore and/or swearing"?

Re:Right on time ... for the price cut!

Too bad the reliability problems have been resolved.

Not to ruin the fun of a good old fashioned Microsoft bashing but the 360 has been fine since last fall. Sure it sucks it launched with so many problems, and I was as mad as anyone about it a year ago, but they made good and now we can concentrate on playing games.. which is the point of the whole thing.

Re:Right on time ... for the price cut!

They haven't been resolved. Although the rate of RROD isn't as high as before (it was around 33% before), it still happens to the newer consoles.

Re:Right on time ... for the price cut!

Too bad you're wrong.

Microsoft is still recycling that enormous pile of steaming 1st gen 360s into the loop by sending them out as replacements for newer machines that die of RROD. So, you buy a newer 360 to attempt to avoid the problems that plague the older 360's but yours dies anyway (even the newer 360's have a failure rate of between 10% & 16%). You send it in to get repaired & you get a lemon back which will only last a year.

With a process like this, you know that the RROD problem is never going away until MS both solves the problem (failure rate < 3%) in a new Xbox design and stops sending out the ticking timebombs as replacements.

Re:TFA is written by nitwits

Nintendo and Microsoft aren't competing for the same market niche, and apparently the author doesn't realize that.

Utter rubbish.

While different consoles do have features that reach out to different niches there remains a huge area of market overlap in which they compete.

If the Wii didn't exist would MS have sold several million more 360s? Of course they would.