Friday, July 06, 2007

Microsoft reserves more than $1 billion for Xbox360 repairs

Microsoft announced that it will reserve between $1,05 billion an $1,15 billion to cover repairs of faulty Xbox360 consoles up until now and to extend the worldwide warranty to three years.

In a press release, the company admits to an intolerable amount of defective units.

As a result of what Microsoft views as an unacceptable number of repairs to Xbox 360 consoles, the company conducted extensive investigations into potential sources of general hardware failures. Having identified a number of factors which can cause general hardware failures indicated by three red flashing lights on the console, Microsoft has made improvements to the console and is enhancing its Xbox 360 warranty policy for existing and new customers.

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.

The money will be taken out of the pre-tax earnings for the last financial year which ended last month.


The recent debate started when technology news site Daily Tech reported that up to one third of all Xbox360 consoles were being returned to stores as defective. The site cited anonymous managers at retail outlets such as EB Games or GameStop. As unlikely as this figure sounds, other polls showed similar results.

Prior to that, the independent UK repair service Micromart had announced it would no longer accept Xbox360 consoles, calling the hardware defects ´endemic´. Company spokesman Geoff Croft told me that the main problem appeared to be the lead-free solder Microsoft used, probably in order to make production more environmentally friendly. In difference to standard solder, this one dries and gets brittle easier. This creates dry joints and the contacts on the boards become insecure, Croft told me.

Is really every third console faulty?

Of course, Microsoft is saying nothing. In the conference call, Bach only spoke of a "meaningful number" and that they "identified several factors" that contribute to the hardware failures.

But there is a way to double-check the findings of the surveys above. Analysts estimate that the $1 billion would be enough to repair around 2,5 million consoles. With around 10 million units sold, that amount would already suggest that Microsoft is counting on fixing every fourth console.

And that does not count out the possibility of Microsoft expecting an even higher number of faulty units. They simply might not want to allocate the entire amount right now, for various reasons. Either way, the estimate of ´up to a third´ of all units failing does not seem to be too far from the truth.

$1 billion hurts

Contrary to popular belief, $1 billion is a significant amount for Microsoft. For the financial year that just ended, Microsoft posted an operating income of $16,5 billion.

Here is a detailed list of the various divisions and their individual performance, prior to the internal change in the company´s operating segments and compliant with the ´U.S. Generally Accepted Accounting Principles (GAAP)´.

Division / Operating income 2006 / 2005 / 2004
(in millions)

Client $10.203 / $9.464 / $8.740

Server and Tools $4.323 / $3.291 / $1.474

Information Worker $8.285 / $8.025 / $7.458

Microsoft Business Solutions $24 / -$171 / -$291

MSN -$77 / $412 / $98

Mobile and Embedded Devices $2 / -$65 / -$237

Home and Entertainment -$1.262 / -$485 / -$1.337

Corporate-Level Activity -$4.988 / -$5.871 / ---

As if losses of $5 billion weren´t enough

So the Home and Entertainment division is the only one that has been consistently in the reds since 2004. In fact, it has been in the reds ever since its creation. In 2002 and 2003, that division cost Microsoft 874 and 924 million, respectively.

If you add that up, this division has incurred a staggering total loss of almost five billion dollars ($4.882 millions to be precise) since 2002.

Prior to 2002, the Xbox was part of the then Consumer Software, Services, and Devices division and even that one has been in the reds ever since 2000.

Bear in mind that an analyst already called Microsoft´s Xbox enterprise a disaster back in April, way before the scale of the console defects became apparent.

Gaming has been a disastrous endeavor for Microsoft, particularly from an investment perspective.

So the $1 billion or so discussed here will almost double the losses incurred by the Home and Entertainment division in 2006. And that sum will deduct around one sixteenth of the entire company´s operating income for that year.

Will Xbox ever become profitable?

So we just learnt that Robbie Bach´s division has now lost Microsoft a total of around $6 billion - pretty much one dollar for each person living on this planet. But when will they become profitable? Will they ever?

Bach was still pretty confident in May, speaking to eWEEK:

It's a business that will be profitable next year—we'll make money next year and that will be the first time, which is pretty exciting. And then the next two or three years are the place where you need to make tracks, and the next two or three years are where you have to make money.

The big question is whether Microsoft is still on track to reach the goal of profitability by 2008. And, perhaps, nothing has changed. The money is coming out of last year´s wallet, so to speak. The current financial year may remain largely unaffected, one might think.

But there are some things Microsoft should be concerned about. After sinking a total of $6 billion, should the shareholders not be ready to revolt by now and demand Microsoft´s withdrawal from the videogame industry? What if the allocated sum is not enough to cover the entire costs of repairs and this whole affair eats even deeper into Microsoft´s profits? What will the shareholders do then?

Of course, after investing billions and billions into an enterprise like this one, you would be desperate to see some returns. You would grind your teeth and bear it. But you would not tolerate another slip-up. I am merely suggesting this: What if this was that very slip-up?

Source: Microsoft Presspass


Anonymous said...

I posted your article on the IGN's Wii General Board to discuss whether Nintendo should have copied MS's strategy of losing billions to gain marketshare.

Anonymous said...

I reckon they've lost around $7 billion on the Xbox project as a whole to date.

Here's what I say:
Even if they became profitable in the near future: how long until it's worth it? If they're lucky they'll make back the money lost so far this gen (now around 2.5B$) by the end of the gen. That's assuming some really massive success. Then what? They'd still be 5 billion in the hole.

Basically MS would need to completely turn around the finances of this generation, and then absolutely dominate the next generation before they'd even return the investment to break even. Even if they dominated the following generation, that would be maybe 5 billion dollars profit after 20 years on the market, and that's counting a lot of chickens to get there. I mean, I'm not even sure we'll have two more generations of consoles. It's not worth it, and if I was a shareholder, I'd be pissed.

Blizz419 said...

if Sony continues on there bad track this gen they may not make a console next gen which will most likely put the market back to 2 consoles. Which would make it easier to start turning a profit on there 3rd system, and i assume they would learn from there mistakes this gen and make a more reliable system. Probably one that doesn't incur as big of a loss on each system, maybe they will break even on each one or like Nintendo make a profit off each system sold from the start.

Anonymous said...

the funny thing with Wii is that at the end of the day there isnt one single must have game out for it yet you still want to buy í know just so that you can play shitty,last gen,gimmick games with the (wannabe) innovative controller...

am i right grand master biatch?

people will buy Wii regardless of software....its the prize and the innovative controller...thats it

p.s...sonst alles chillt bei dir flaffi?wie gehts mrs flaffi?erfreut sie sich immer noch so sehr an den messages? she is havin a good time?.....hau di weida...pfirti..lass dich net stressen



Anonymous said...

It’s official; the 60 GB PS3 will only cost $499 starting Tuesday.


Anonymous said...

microsoft are a joke millions starv all over the world bill gates says he cares then flushes 7 billion down the toilet in a market his share holders dont want to be in THOUGFHT YOU WERE SMAERT BILL GATES

RGB said...

In Bills defense (I do not like him FYI), I believe he is the highest charity giver that comes out of USA.

Anonymous said...