X Marks the Box
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Doing the right thing can be difficult—and costly. |
Microsoft's massive $1 billion-plus Xbox indemnification— the extension of warranties from one-year to three-years in response to device failures—puts the console's future profitability and public perception in doubt. The announcement comes in response to an unusual number of Xbox 360 failures.
"The fact that Microsoft is taking action and not hiding its head in the sand is encouraging," said David Riley, an NPD senior manager.
In a conference call yesterday, Robbie Bach, president of Microsoft's Entertainment and Devices division, said the number of failures is "unacceptable to us."
Microsoft is taking the charge for its fiscal fourth quarter, which ended June 30. The move puts the black mark on its 2007 books. During yesterday's conference call, Chris Liddell, Microsoft's chief financial officer, indicated that the charge would have no impact on the Entertainment and Devices division's fiscal 2008 results and that the company maintained its forecast for profitability during the new fiscal year.
That said, the charge against fiscal 2007 relieves the division of any fiscal 2008 handicap. By taking a lump-sum charge, Microsoft minimizes the potential negative impact, from both the financial and public relations perspectives. Microsoft takes one hit at the end of fiscal 2007 and moves on.
Regardless, the Xbox failure problems raise a specter over the console's future success. Microsoft missed its end-of-June sales forecast by about 400,000 units (meaning that 11.6 million consoles have shipped since Xbox 360 launched), and Nintendo's Wii easily outsells the Xbox 360 at retail, according to NPD.
The news could further hurt sales, which is beneficial or detrimental, depending on your perspective. Even without the charge, Microsoft loses money on every console that it sells. Fewer console sales could reduce Entertainment and Devices division losses.
But, if you look at it another way, reduced console sales could negatively affect game sales and thereby affect Microsoft's longer term Xbox 360 strategy. Some analysts rightly have called the console a Trojan Horse for broader entertainment and service offerings because people need to buy consoles for the strategy to eventually work.
Next week's E3 Conference will be one opportunity for Microsoft to push past the bad news with some good news, depending on which new Xbox 360 games they announce.
Storm Brewing
Gamers' complaints about Xbox 360 have filled forums and blogs for months, with failure estimates in the one-third range, according to DailyTech, or as much as one-half when weighing Microsoft's financial charge against the number of consoles sold.
This morning, I called a couple of GameStop stores. Managers said that they weren't seeing high return rates for the Xbox 360. However, they confirmed that nearly all returns are due to symptomatic overheating and exhibit the "Red Ring of Death." In its least troubling form, the flashing red ring is like Windows' "Blue Screen of Death," where the console can be recovered by restarting. More typically, however, the red ring signals overheating, the managers said.
I also spoke to Geek Squad reps at two different Best Buy locations. Proportionally, Xbox repairs are higher than other consoles, both reps said. However, the number of repairs is fairly low because most customers don't purchase extended warranties for game consoles, the reps said.
Based on forum posts, many failures occur months after purchase, which means many retailers aren't involved at all. Therefore, a lower number of in-store repairs wouldn't necessarily be indicative of the problems' scope.
Bach wouldn't discuss the percentage of returns or repairs. "It's a meaningful number," he said, and "one that has our attention."
Microsoft's three-year warranty only applies to Xbox 360s with the red rings. Microsoft maintains its one-year warranty, otherwise, Bach said. So, the three-year extension is conditional on console failure. The limitation measured against Microsoft's charge gives some hint to a large number of failures.
"Who knows just how widespread the failure rates really are but it's obvious that Microsoft understands the importance of keeping consumers happy," Riley said. "The 360 is a strong product with a large following from both consumers and publishers."
Riddell made it clear yesterday: "Customer satisfaction is a top priority for Microsoft."
Maybe, but Microsoft has good reason to protect its Xbox 360 brand. Gamers tend to be a chatty lot, whether through interactive gaming or online forums. Bad news spreads fast through this kind of community.
The community has been vocal about Xbox 360 problems since its launch. Based on the chatter and my conversations with retailers, overheating is by far the top technical problem affecting the console.
Bach didn't acknowledge overheating as the fundamental problem. He referred instead to several functions that can "cause general hardware failures." The Red Ring of Death is symptomatic of those problems.
So I have to ask: How is your Xbox 360? Are you a happy camper or will you be camping outside Microsoft headquarters waiting for your console repair? Our comment lines are open.
Comments (16)
Thanks for post Joe.
A few points here why I will not be buying an Xbox360.
First, MS finally decided to acknowledge that its product had major problems, but even at 3 years, is this enough for a badly designed (overheating) gaming console that you will only end up having more problems with at the end of the 3years?
While this sounds like M$ is paying for all the problems and that is custermers will get reimbursed for all their costs with this defective by design product, this is not the case for everybody.
How many people have saved their paperwork or throw away their defective Xbox360's? They will not be paid.
Also, MS has no plans to reimburse scatched non-ms xbox360 disks due to their poor designs. Game disks can end up costing a lot more than the orginial game console once you buy a few.
While I would normally give M$ good grades for extending the warranty to 3 years, I just can't in this case. They should have been on this a long time ago, and put their custermers first.
Could it have been all the blog pressure that made M$ do this? Could it have been the EU investigation into the Xbox problems that arre ongoing? More likely. Sadly, we must depend on the EU to protect us, as most of our politicians here in the USA seem to be bought and paid for by companies like M$. Absolute Power (money) corrupts absolutely.
Posted by chips b malroy | July 6, 2007 4:08 PM
I wonder why Ballmer is MS's head yet.I just would think that Gates admires him (something similar cardinal Giulio Mazarino and the queen Ana -of course I am referring only to the political thing-.)
Posted by Marco | July 6, 2007 4:43 PM
Microsoft has "done the right thing" before, but in my opinion characterizing this as one of those times is just wrong.
There is a difference between "doing the right thing" and fixing a major hardware glitch for an entire product line. At $1.15B for only 11.5M units, we're looking at about $85 a box. This is a huge outlay of cash, and dwarfs anything before it in the tech industry that I'm aware of.
It's "doing the right thing" only when taking no action would likely result in nothing worse than some bad PR and perhaps a class-action suit, the settlement of which would likely be less expensive than the "right thing" would cost.
What Microsoft is doing is a full-scale attempt to avoid the loss of the Xbox business altogether while Sony still has it's cranium up its rectum. The amount of money involved makes it quite clear Microsoft knows this issue is very widespread.
Microsoft's actions here have nothing to do with doing anything right, and everything to do with saving a business they hope will turn a profit some day. After you've already lost six billion on it, what's another 1.15?
Posted by Tom | July 6, 2007 5:14 PM
Tom,
By "doing the right thing," I should not have pertrade MS as completely evil. After all, good and evil is more of a grayscale sort of thing. Perhaps MS thought this was enough to save its Xbox business and keep its custermers happy?
Not sure you can fix a problem with a product that has an inherent bad designs built into it. The bad design is of course the overheating of cpu type chips with very limited space to install proper heatsinking and fans for cooling. It may not be possible to actually fix the old units, without having them just fail again down the road.
Then there is the other problem with the scatched Xbox360 games cd's. MS has earilier agree to replace these scatched disks, but only the ones from MS, not the non-MS game disks. We are talking a pile of money here for some folks.
I do believe that the pressure put on them by the EU is not to be downplayed.
Posted by chips b malroy | July 6, 2007 5:41 PM
The question I have is what kind of company lets millions of defective products into the channel, and then when it identifies the overheating problem, keeps shipping them anyway? It took threats of a class action lawsuit to get Ballmer and Bach to "do the right thing" -- LOL!
The main processor in XB360 dissipates over 60W. Imagine putting a 60W light bulb in an enclosure that small. Now add a couple of 20W bulbs for the other chips and you see what the problem is. It's a bad design and they knew about the potential problems from day one. The fact that it has stayed a problem for this long speaks to the competence of the engineers and managers at Microsoft. But hey, shareholders will pay the freight, they always do.
Posted by Ed T | July 6, 2007 6:01 PM
Tom and Ed T;
Some really inspired ideas in both of your comments, that have me thinking in different ways. Perhaps, as good as Joe Willcox web post are, sometimes the comments (when not just bashing for your fav team) can be equally educational.
This is one of the reason I do not post in Linux watch, as the comments are not visible. Joe, is not afraid of the comments, which I commend him on. Not that Linux watch is, it just needs a format like MS Watch. Linux Watch does not encourage viewer input.
Ok, back to the subject. One billion dollars to extend part of the Xbox360 warrenty to 3 years, sounds like a lot. Isn't this the company that makes 70 billion a year in income? And has 29 billion in cash reserves in the bank?
Perhaps, one billion is cheap, compared to doing nothing. Once the class actions suites come to an end, and the EU takes actions, it could be a whole lot more.
Posted by chips b malroy | July 6, 2007 8:28 PM
Marco ;
Quote;
"I wonder why Ballmer is MS's head yet.I just would think that Gates admires him."
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LOL, Marco, you know why. Billy still pulls all the strings at M$. he is the largest shareholder. Paul Allen was Bills childhood friend, and co-founder of MS. Ballmer was a later addition, but still an early addition to Bills group of friends.
Steve Ballmer is not a stupid man. He may look it sometimes. Ballmers worth is between 12 and 14 billion and mostly invested in MS. As long as he is a yes man to Bill, his future as CEO at M$ is assured. Not that I think that he is a "yes" man, only that in truth both Steve and Bill agree one the one thing they can, money. And they both know how to get it, whatever means is needed. They don't care about the users except to extract money from them. Vista is a prime example of this, with DRM as it main reason for being rushed out to market.
Don't even think that M$ cares anymore if its the 95% of the market OS anymore. They perhaps see that being a niche OS like Mac will be profitable in the future, and will continue MS for a long long time.
Posted by chips b malroy | July 6, 2007 9:27 PM
"this is why I don't post to the linux-watch".
I tell you what Chip. I went over to linux-watch. 9 out of 10 posts are whinning and crying about Microsoft doing this and Microsoft doing that and how bad is Vista and how bad is Microsoft...IT'S PATHETIC. Most of linux advocates, post at Microsoft-Watch for some more whinning and crying...ENOUGH GUYS. GET OVER IT. Start posting about linux and STOP the whinning. It's not just linux-watch. Most linux forums have similar content. This is a the wrong attitude, it does not help linux and will backfire soon...
Posted by evan | July 7, 2007 2:21 AM
evan :
Quote;
"this is why I don't post to the linux-watch".
I tell you what Chip. I went over to linux-watch. 9 out of 10 posts are whinning and crying about Microsoft doing this and Microsoft doing that and how bad is Vista and how bad is Microsoft."
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Could it be that Vista is really that bad? Could it be there really is something out there a whole lot better than M$ Vista?
Could it be that Vista cost too much, and does too little? Could Vista still be the same viral magnet that MS has always been? Its not that nothing has changed Evan, its that it has gotten worse with MS.
MS could have fixed some of this stuff. Linux on the other hand is free, and has improved, and continues to improve.
And then there is the Xbox and Zune, LOL.
Posted by chips b malroy | July 7, 2007 2:38 AM
yes chips. There is a possibility that Vista is that bad and Microsoft is even worse. However, having that attitude and making it and end in itself to whine about Microsoft all the time (in a linux forum not to mention other forums), does not help linux and it's pathetic to say the least. Personally, it gives me the impression that I am dealing with a batch of losers.. Is that the impression linux supporters want to convey?
Posted by evan | July 7, 2007 4:56 AM
I worked for a company contracted to do the tech support for the 360 last Christmas season. I must say I was shocked then at the number of repair requests I handled. Everyday I was fielding calls from customers getting hardware failures. Typical Microsoft, always putting out products that are half finished. I only stayed at the job for a month, as I got tired of all the complaints and insults towards me and the trash company I was representing. Don't buy it people. Nintendo and for the most part Sony at least make a real effort to be ready, Microsoft does not care.
Posted by Darryl S | July 7, 2007 11:25 AM
evan :
Quote;
"yes chips. There is a possibility that Vista is that bad and Microsoft is even worse."
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One has to admitt their is a problem first, before getting help, in this case the problem is the ms upgrade path to Vista, the cure is to keep XP and dual boot Linux, or buy a Mac.
I have no problem with the negative on M$, as long as its truthful. Information should be available for people, so they don't waste their money on Vista or Xbox360 type products. Negative, or whining comments can be useful when they inform. Only in this way can we help people not buy a lemon.
Posted by chips b malroy | July 7, 2007 11:58 AM
So they have sold 5.6M in the US and shipped 11.6 M units. So taking into account some sales from other regions, you are still looking at a couple of million there are stuffed in the channel.
How many of these have been upgraded to avoid these meltdowns? Me thinks not a lot and it will be a lot more that $1B for Microsoft.
Posted by Dateman | July 9, 2007 9:16 PM
More problems for M$ on its Xbox360 failures. A class action lawsuit;
http://arstechnica.com/news.ars/post/20070710-scratched-xbox-360-discs-lead-to-lawsuit-against-microsoft.html
These scratched disks, can be a lot more expensive, than the red ring of death failure of the Xbox360 console itself.
Posted by chips b malroy | July 10, 2007 6:49 PM
Anyone remember how Sony was giving free laser repairs even past warrenty? This is the price of doing business in the console market. Even the original Famicom had a high failure rate (due to bad 6502 CPUs). It happens. Although it is funny to see MS make THAT big of a hardware design flaw.
Posted by Joe Whitehead | July 13, 2007 6:39 AM
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Posted by Patty | September 19, 2007 12:00 PM