Microsoft to Take $1B Charge for Xbox 360 Warranty Extension

Discussion in 'Stocks' started by crgarcia, Jul 5, 2007.

  1. Microsoft to Take $1B Charge for Xbox 360 Warranty Extension

    SEATTLE (AP) -- Microsoft Corp. said Thursday it expects to spend more than $1 billion to repair widespread hardware problems in its Xbox 360 video game console after a large number of them broke down.

    Microsoft said it would extend the warranty on the Xbox 360 to three years after too many of the consoles succumbed to "general hardware failure," but the company provided few other details about the extent of the problems.

    "We don't think we've been getting the job done," said Robbie Bach, president of Microsoft's entertainment and devices division, which also makes the Zune digital music player. "In the past few months, we have been having to make Xbox 360 console repairs at a rate too high for our liking."

    Bach said the company made some manufacturing and production changes that he expects will reduce Xbox 360 hardware lockups, but he declined to identify the problems or say which others might remain. Microsoft said it will record a charge of up to $1.15 billion for its fourth fiscal quarter, which ended June 30, to cover the additional costs associated with the warranty extension.

    The software maker also said sales of the console fell short of expectations for the fiscal year that just ended.

    Matt Rosoff, an analyst at the independent research group Directions on Microsoft, estimates that Microsoft's entertainment and devices division has lost more than $6 billion since 2002.

    Microsoft has written down larger amounts in the past -- more than $10 billion in the late 1990s related to investments in telecommunications companies, and more than $5 billion related to antitrust issues -- but a $1 billion write-down for one division in one quarter is significant.

    "It suggests the problem is pretty widespread," Rosoff said.

    Microsoft will pay for shipping and repairs for three years, worldwide, for consoles that experience hardware failure, which is usually indicated by three flashing red lights on the front of the console, something gamers sometimes refer to as "the red ring of death." Previously, the warranty expired after 1 year for U.S. customers and 2 years for Europeans.

    Microsoft also will reimburse the "small number" of Xbox 360 owners who have paid for shipping and repairs on out-of-warranty consoles, Bach said.

    In June, bloggers speculated that the Xbox 360 return problem was getting so severe that the company was running out of "coffins," or special return-shipping boxes Microsoft provides to gamers with dead consoles. "We'll make sure we have plenty of boxes to go back and forth," Bach said in an interview.

    Chris Liddell, Microsoft's chief financial officer, said in a conference call that the company sold 11.6 million Xbox 360 consoles since the product's November 2005 launch, missing a target for 12 million units by the end of the fiscal year.

    Microsoft's entertainment and devices division reported an operating loss of $315 million on $929 million in sales for the three-month period that ended in March.