July 5, 2007 11:31 pm

Microsoft expects $1bn charge over Xbox

Microsoft on Thursday revealed that it would take a charge against profits of more than $1bn as it tried to limit the potential damage to its videogames business from a technical flaw in the Xbox 360 games console.

The estimated pre-tax charge of between $1.05bn-$1.15bn would cover extended warranties for 11.6m machines that have already been sold, as well as nearly 2m more that have been made but not yet sold, the company said.

In spite of sporadic reports of hardware failure in recent months, problems with the Xbox 360 have not emerged publicly as a broader issue. The flaw leads to a hardware failure in the machines, producing three flashing red lights on the console.

Robbie Bach, president of Microsoft’s entertainment and devices division, refused to reveal how many customers had experienced the technical problems, but characterised the new warranty programme as a pre-emptive attempt to deal with the issue and prevent any wider reputational damage.

Rushed out late in 2005 to beat new games consoles by Sony and Nintendo to market, the Xbox 360 marked the culmination of a highly ambitious technical race in a hardware business that is not core to Microsoft’s traditional area of expertise. Mr Bach denied that the product failures showed Microsoft had launched the console before it was ready, or that they resulted from the company’s relative weakness in hardware design.

“We’ve had to do a lot of investigation work and testing to understand its combination of things, not one error,” said Mr Bach, who blamed the problem on Microsoft’s own hardware design rather than its suppliers.He added that Microsoft only became aware of the problems more than a year after the Xbox 360 was launched.

The charge will add to sizeable losses that Microsoft has suffered in its efforts to break into the video game business. Its digital entertainment division, which is based largely on the Xbox business, has registered losses of more than $4bn since the first version of the games console was launched.

While conceding that Microsoft has spent billions of dollars to break into the videogames market, Mr Bach said it had also created “billions of dollars in asset value” thanks to the new business. The warranty chage will dent profits for the final quarter of Microsoft’s last fiscal year, which ended in June. The videogame business is still on track to report its first profits in the current fiscal year, Mr Bach said.

Under the new warranty, Microsoft said it would pay repair and shipping costs for any machine that suffered the “three flashing red lights” problem for up to three years after purchase. It believed that it had got to the bottom of the technical problem and that machines made from now on would not suffer the same problems.

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