Microsoft Extends Xbox 360 Warranty

July 6, 2007 — -- Microsoft (MSFT) on Thursday extended the warranty on its Xbox 360 video game console and said it will take a charge of more than $1 billion to pay for "anticipated costs."Under the new warranty, Microsoft will pay for shipping and repairs for three years, worldwide, for consoles afflicted with what gamers call "the red ring of death." Previously, the warranty expired after a year for U.S. customers and two years for Europeans.

Microsoft said it should take two to four weeks to repair damaged consoles.

The charge will be $1.05 billion to $1.15 billion for the quarter ended June 30. Microsoft reports its fourth-quarter results July 19.

The announcements come amid customer complaints and speculation among bloggers that Microsoft was running out of "coffins," special return-shipping boxes Microsoft provides to gamers with dead consoles.

Microsoft acknowledged "an unacceptable number of repairs." It said it had investigated the sources of hardware failures indicated by three red flashing lights. The software giant has made manufacturing and production changes to reduce the hardware failures, says Robbie Bach, president of the entertainment and devices division.

"There isn't one certain problem; it's a combination of a number of different factors," Bach said in an interview.

Bach declined to say what Microsoft fixed, nor would he say how many gamers sent in machines for repair. The percentage is "a meaningful number, and it has our attention," he said.

Microsoft shipped 11.6 million Xboxes through June, compared with a target of about 12 million, CFO Chris Liddell said in a conference call Thursday.

"The majority of Xbox 360 owners are having a great experience with their console and have from Day One," Bach added.

Analysts said the scope of the problem, plus nagging concerns about the reliability of the Xbox 360 — introduced to much fanfare in November 2005 — forced Microsoft to take drastic actions.

"Microsoft is finally acknowledging that there's a serious problem and doing what it has to do to keep existing customers happy and buying games," says Matt Rosoff, an analyst at Directions on Microsoft.

But the charge and change in warranty could hinder sales as Microsoft dukes it out with Sony(SNE) and Nintendo in the $12.5 billion console market, he says.

Microsoft's entertainment and devices division, which makes the Xbox 360 and the Zune digital music player, reported an operating loss of $315 million on $929 million in sales in the third quarter this year.

Microsoft made its announcements after markets closed. Its stock fell 11 cents to $29.88 in after-hours trading.