...from:

http://www.nytimes.com/2007/07/06/business/06soft.html? th=&adxnnl=1&emc=th&adxnnlx=1183781121-q74ntW7AImNEg5Ocy39D3w

OR

http://preview.tinyurl.com/29pzvl

Microsoft to Spend $1.15 Billion for Xbox Repairs

By ERIC A. TAUB

Published: July 6, 2007 LOS ANGELES, July 5 — In what may be one of the costliest consumer warranty repairs in history, Microsoft announced on Thursday that it would spend up to $1.15 billion to repair failing Xbox 360 game machine consoles.

While the company would not say how many units were failing, Robbie Bach, president of Microsoft’s entertainment and devices division, said that there have been an “unacceptable high number of repairs.” The majority of Xbox 360 owners, he said, have not experienced hardware failure.

Company officials said that Microsoft had sold 11.6 million Xbox 360 units by the end of June, shy of the 12 million units the company had predicted. The Xbox 360, which first went of sale in November 2005, is currently the best-selling game machine in the United States, according to NPD, a market research firm.

The size of the anticipated repair bill suggests that a third to as many as half of the machines are flawed.

Microsoft, based in Redmond, Wash., said it would take a charge of $1.05 billion to $1.15 billion against earnings in the quarter ended June 30. Consumers know they have a problem if three red flashing lights appear on the console. Gamers on online forums have been referring to the event as “the Red Ring of Death” because the machine then shuts down.

The company declined to explain the nature of the failure, but said that it was not caused by a single problem in the console, which it said contained 1,700 components and 500 million transistors. The company also said there were no health or safety concerns involved. The problem began to appear over the last three to four months, Mr. Bach said, after “significant usage” of the consoles. He said the company has taken steps to correct the problem in new devices.

Microsoft said it would extend the warranty of the game console to three years to customers worldwide. Previously, products sold in the United States were covered by a one-year warranty, while Xbox 360 units sold in Europe had a two-year warranty.

In addition, customers who have had their consoles repaired because of the “three flashing lights” problem will be reimbursed for the cost of the repairs.

Microsoft has succeeded in establishing the Xbox brand against the better known Sony PlayStation and other game machines. The Xbox and its successor, the Xbox 360, was the software maker’s first major foray into hardware. Although sales are small relative to the rest of Microsoft’s revenue, the Xbox has been an important venture for the company and was viewed by many analysts as Microsoft’s attempt to compete with the likes of Sony and Apple for control of electronics and entertainment within homes.

The device can be used to access the Internet and view movies. Microsoft said its entertainment and devices division reported an operating loss of $315 million on $929 million in revenue for the three-month period that ended in March, and analysts have estimated that the company lost about $6 billion getting a foothold in the game machine industry.

A new Xbox 360 with a 20-gigabyte hard drive sells for about $400, but other versions cost about $300.

The announcement comes on the eve of the E3 Media and Business Summit, the video-game industry’s major trade show, to be held next week in Los Angeles. “This is bound to affect discussions between Microsoft and its developers and retailers,” said Richard Doherty, a partner in the research company Envisioneering Group.