Microsoft taking a ONE BILLION dollar hit on the crappy 360 design! OUCH!

[Anthony1]

I know there is another thread about the 3 year warranty, but I think the 1 billion charge is deserving of it's own discussion. One billion dollars DUDE!!!

Man, this has to be a serious, serious blow.

http://news.yahoo.com/s/nm/20070705/tc_nm/microsoft_xbox_dc_6;_ylt=AmZC358P04Ewfy2C1t4FZ5ME1 vAI


"Microsoft Corp. (Nasdaq:MSFT - news) said on Thursday said it would take a more than $1 billion charge to fix "an unacceptable number of repairs" to its Xbox 360 video game consoles and had missed shipment targets for the end of June.
The charge will be in a range of $1.05 billion to $1.15 billion, before taxes, for the quarter ended June 30, Microsoft said.

Microsoft had already cut its forecast for Xbox 360 shipments in January. It had previously forecast shipments of 13 million to 15 million by the end of June.

"What you have to ask yourself as an investor is, should Microsoft be in the hardware business?" said Kim Caughey, senior analyst at Fort Pitt Capital Group, which oversees about $1.2 billion, including Microsoft shares, for clients.

She added, however, that the charge should not be a concern for long-term investors.

"It's a lot of money, let's not say it isn't," Caughey said. "But if you're a long-term holder, I don't think it's going to have that great an impact."

Bach said the new warranty would not impact the Xbox division's plan to turn a profit in fiscal 2008, which started this month.

He was also mum on the issue of whether Microsoft would announce a price cut for the Xbox 360 console if Sony made a similar move.

"We will assess what we do with pricing and other aspects of our business based on our own business," he said.

Microsoft shares dropped slightly to $29.91 after closing at $29.99 on Nasdaq."


Wowsers. Taking a 1.15 billion charge is freaking ridiculous. I knew that they were fixing a god awful number of Xbox 360's and that somebody has to be paying for this shit. It's not like they can fix them for free, and ship them for free and all that. So they are going to have to take a freaking 1.15 billion charge!!!! That is fucking amazing. One Xbox 360 premium costs about $431 when you factor in tax ($399 + tax). So if you take 1.15 billion, and divide it by $431, you get nearly 2.7 million Xbox 360s. In other words, Microsoft could have given away the first 2.7 million Xbox 360's for free, and they would have lost the same amount of money as taking a 1.15 billion charge. That is absolutely astonishing to me. I'm not so sure Microsoft doesn't pull the plug on the whole 360 thing altogether. You look at the 360 and the Zune, and I think it's becoming quite obivious that Microsoft doesn't know what it's doing in the hardware space. It's a software company, trying to morph into a hardware company, and it's having a real tough go at it. I enjoyed the Xbox 1 immensly, and I enjoy the 360 as well. I had one 360 die on me so far, it was a launch day console. It almost survived a full year, then it died. I bought it at Costco, so I got another one for free without having to send it anywhere, so it didn't bother me any. I didn't have my 360 for only 1 day. But for others that have had to ship it out and wait a month or more to get it back, I can understand how that might frustrate. On top of that, some people had to pay to send it out, then later got reimbursed or whatever.

But goddamn!!! 1 FREAKING BILLION DOLLARS!!! How is the entertainment division of Microsoft going to ever be profitable?? Just when it was starting to look like things were looking up for the Xbox 360. And what does this do to a possible price drop? Can they really afford to do a price drop now? Sony is going to drop their price $100, and I thought it was an absolute given that MS was going to do a pre-emptive strike and announce a $100 price drop the night before Sony's keynote. But now, with this 1 billion charge, I just don't see how they can get away with it. I think they absolutely need to do it to have a legitimate chance at taking the No.1 market share position in North America from a long term standpoint, but goddamn.....MS can only take so much bleeding. At some point they are going to raise the white flag and say fuck it. I can tell you right now that we aren't going to see any portable gaming system from MS. They tried the Xbox 1 and failed. Tried the 360 and have done relatively mediocre, but if you look at this chargeback and their dwindling NPD numbers, it's starting to point towards failure (at least from a fiscal sense), and the Zune has been a complete dissaster. When do you just cut your losses and take your ball and go home?

[smork]

I love my 360, but I do wonder how long they can afford to be in the game business when they are bleeding money like that. And after how much money they lost on xbox 1, and how they were losing money on each consoles sold... They are a public company, so it can't really go on forever, can it?

I do wonder what's ahead, now that both Sony and MS are confirmed to be bleeding money in their games divisions.

[Buyatari]

and worth every penny !

[Push Upstairs]

Ever seen what they charge for their computer software?

$300+ for Vista Ultimate?
$270 for XP Pro?
$400 for Office Pro 2007?

Thats probably helping ease the pain.

[NYLatenite]

In reality, you can probably look at this announcement as a long-term recall. Simply put, if Microsoft knows that most Xbox 360's will fail within 3 years of purchase, this allows them to effectively recall the product without getting as much negative press as a full recall announcement would create. (In fact, it's creating quite a bit of good press in many circles)

One thing to remember is that Microsoft has also stated that they believe they have fixed the problem causing the RROD issue (most likely with the twin heatsink/heatpipe being seen in recently repaired units), so unlike previous repairs, odds are the next time any user sends their system in for service, the actual problem will be corrected.

Finally, the projected 1.15 billion hit they're taking is being applied to the quarter ending June 30th, 2007 - a quarter in which they were already expecting to see a loss. Given Robbie Bach's projections that the 360 will be profitable in 2008 and the amount of money the company is making on the Live Marketplace, I could easily see the company weathering any shareholder discontent the warranty bill may cause.

[smork]

In reality, you can probably look at this announcement as a long-term recall. Simply put, if Microsoft knows that most Xbox 360's will fail within 3 years of purchase, this allows them to effectively recall the product without getting as much negative press as a full recall announcement would create. (In fact, it's creating quite a bit of good press in many circles)

One thing to remember is that Microsoft has also stated that they believe they have fixed the problem causing the RROD issue (most likely with the twin heatsink/heatpipe being seen in recently repaired units), so unlike previous repairs, odds are the next time any user sends their system in for service, the actual problem will be corrected.

Finally, the projected 1.15 billion hit they're taking is being applied to the quarter ending June 30th, 2007 - a quarter in which they were already expecting to see a loss. Given Robbie Bach's projections that the 360 will be profitable in 2008 and the amount of money the company is making on the Live Marketplace, I could easily see the company weathering any shareholder discontent the warranty bill may cause.

All excellent points -- I'm no MS fanboy (as I type this on a Linux box in Firefox) but I do enjoy both xboxes. It's really in the interest of all gamers to have not only a strong and profitable Nintendo but a flourishing MS & Sony as well. 3 healthy competitors means a) more and higher quality product b) more competition -- drives innovation as companies try to position themselves apart from their competitors.

Hopefully MS uses the knowledge gained from the first 1.5 years of hardware failures to revise the hardware and make it more reliable -- and cheaper! (and add built-in Wifi, dammit!)

[sabre2922]

At least any newly purchased Xbox360s will most likely have a longer lifespan than 3 months:hmm: wich seemed to be the norm for early adopters.

Im sure any new 360 consoles sold/ repaired after say June '07 will be far more reliable.

[Bojay1997]

a lot of companies wouldn't do this at all and would instead wait for class action lawsuits and severe pressure. I applaud Microsoft for doing this.

[chicnstu]

Microsoft is looking even more like Sega.


a lot of companies wouldn't do this at all and would instead wait for class action lawsuits and severe pressure. I applaud Microsoft for doing this.


I don't think they deserve applause. They messed up in the beginning then just now sort of fixed it. So they are now even with themselves. Once they do something more (that's good) then IMO they deserve applause.


At least any newly purchased Xbox360s will most likely have a longer lifespan than 3 months:hmm: wich seemed to be the norm for early adopters.

Im sure any new 360 consoles sold/ repaired after say June '07 will be far more reliable.

Anyone agree with this? I'm buying a 360 the 13th and am hoping it will be better quality than they used to be.

[Wolfrider31]

That is painful, especially considering they aren't breaking even on the 360s. I wonder if revenue from the other MS divisions are being used to offset the hurt. It does give me cause for concern though, I mean, the games division can't be a huge section of MS and if its hemorrhaging cash like this it may be a good idea (from the suits point of view) to amputate (catch the medical metaphor there? Oooh clever I am).

Then again prolly not.

[segagamer4life]

and worth every penny !


hell yeah.... I agree with ya... best 400 bucks I have spent in a long while....

[gepeto]

Well the truth I believe is that they get this as a hugh tax write off. Although I commend Ms for extending the warranty I really believe this has more to do with the true failure rates eventually coming out and in order to qualify for a tax write off you have to release your numbers.

This way when the numbers are released they can say well we increased the warranty for 3 years. Buy with confidence.

The conspiracy side of me says they have found away to disable the check engine light.

[Trebuken]

Their stock only fell .09¢. If the investors aren't concerned then we shouldn't be either. All that money was spent to make sure people had a system; it was good customer service, after disappointing hardeware developement.

Halo 3 is expected to approach $200 million on it's own so I am not too worried for MS. They are not going anywhere espeacially if they are still expected to announce a profit this year and given that they will only be more profitable in the following years given the hardware issue is now solved. I am sure they wanted the hardware concerns removed in time for the holiday season.

[Anthony1]

Anyone agree with this? I'm buying a 360 the 13th and am hoping it will be better quality than they used to be.


Just make sure to buy your consoles from Costco. I bought my 360 from Costco, and when it died, I returned it and got a brand new one the same day, without paying a penny. I had it for almost a full year. Costco's warranty is better than anything. The hell with sending my dead 360 to Microsoft and not having a 360 for a full month. I just wish I bought my PS3 from Costco. I would have if I could, but it was impossible during launch. Once PS3's started showing up at Costco, I should have bought one there, and then sold my other one. Even if I took a $100 loss, it would have probably been a good idea, considering the peace of mind it would have brought me.

[ProgrammingAce]

Well the truth I believe is that they get this as a hugh tax write off. Although I commend Ms for extending the warranty I really believe this has more to do with the true failure rates eventually coming out and in order to qualify for a tax write off you have to release your numbers.

This way when the numbers are released they can say well we increased the warranty for 3 years. Buy with confidence.

The conspiracy side of me says they have found away to disable the check engine light.

Why on earth would a company get to write off warranty repairs on their taxes?

[Emuaust]

They can work it as a tax write off as a loss of income, I think, my us tax knowledge is flaky at best.

Bu all it is proving is what Ive said all along about this console war, the only reason MS
ever got involved was due to forseeing the downfall of current computing methods.

If an all in one console/entertainment machine came out that had mouse and keyboard support
as well as internet functions, then a certain percentage of casual PC gamers, possibly developers as well
would swing away from the pc market.

If you didnt have to have a MS os for gaming, im sure some of the FREE os's would
more then meet your requirements for web browsing and email collection, this leads me to my point, MS make money out of selling pc software if that market is
threatend it could be a huge issue for them, therfore chuck a heap of money into counter attacking the threat.

My 2 cents anyways.

[chicnstu]

Just make sure to buy your consoles from Costco. I bought my 360 from Costco, and when it died, I returned it and got a brand new one the same day, without paying a penny. I had it for almost a full year. Costco's warranty is better than anything. The hell with sending my dead 360 to Microsoft and not having a 360 for a full month. I just wish I bought my PS3 from Costco. I would have if I could, but it was impossible during launch. Once PS3's started showing up at Costco, I should have bought one there, and then sold my other one. Even if I took a $100 loss, it would have probably been a good idea, considering the peace of mind it would have brought me.


Thanks for the suggestion. Not sure if I'll be able to buy from there, the closest one to me is in Greensboro (24.5 miles away according to their site). I'll try anyway though because I really can't afford to send 360s back every 3 months.

Did you have to pay for some type of warranty to be able to get another one? If so, how much?

[8-bitNesMan]

I realize that 1 billion dollars is a substantial amount of money. But is it really going to hurt the house that Gates built? I think not so much. IMO, they're still going to be in better shape than Sony. Even if Sony does drop $100, I still think Microsoft has them beat this gen. They have more games and better online capabilities. And I DO applaud them for their efforts to right their wrongs. I doubt Sony would do the same thing. On the contrary, they would try to find a way to blame the customer, like they did with the poor sales of the PS3. ("It's society's fault that we're losing; surely we didn't fuck up") Paraphrased a little, but you get the idea. It will be very interesting to see how it plays out, to be sure. You gotta know Nintendo's loving being #1 again.

[gepeto]

Why on earth would a company get to write off warranty repairs on their taxes?

Businesses do it all the time. It would go down as a business expense that when they itemize the taxes the repairs takes away from the profit. The fact that they pay for shipping and pay for repairs. I don't know the exact term but they will definately write off the repairs. It is similar to when people default on there credit cards. Peoples credit are messed up for years no sweat to the companies because they will write off the loss anyway. They really lose nothing. It is crazy.

Honestly I new it was only a matter of time because I believe when you write off the books the books have to be open. If the issue was small enough they could probably could have eaten it and denied everything but this is too big not to.

[Bronty-2]

Their stock only fell .09¢. If the investors aren't concerned then we shouldn't be either. .

I'm sure they are at least somewhat concerned by it. The stable stock price just means that investors weren't surprised by it. The games division losing bucketloads isn't exactly news.

[Bronty-2]

no sweat to the companies because they will write off the loss anyway. They really lose nothing. It is crazy.

.

Why people can't understand that a $1 write off is worth a lot less than $1? It's pretty simple. If you're paying taxes at a 30% rate, the $1 write off is worth 30 cents to you. So when people say the companies lose nothing - that's just incorrect. They lose 70c in this example.

[gepeto]

Why people can't understand that a $1 write off is worth a lot less than $1? It's pretty simple. If you're paying taxes at a 30% rate, the $1 write off is worth 30 cents to you. So when people say the companies lose nothing - that's just incorrect. They lose 70c in this example.

That may apply for everyday folk but Ms has people working the write off angle to the point that they will get dollar for dollar if not more. If you read the words in a lot of the press release they use the word charge. I doubt that all the repairs cost will total 1 billion dollars. Plus when you take away from the profit there is less to tax.

[Bronty-2]

That may apply for everyday folk but Ms has people working the write off angle to the point that they will get dollar for dollar if not more. If you read the words in a lot of the press release they use the word charge. I doubt that all the repairs cost will total 1 billion dollars. Plus when you take away from the profit there is less to tax.

No offense, but I don't think you understand. A dollar lost is a dollar lost, except for the fact that there is less profit to tax, as you say (which is where the 30c to 50c savings comes in).

I'm sure that they do have the best possible professional advice, but with a company that makes as much profit as MS the goal would be to get the profits into a low tax rate jurisdiction which would *lessen* not improve the value of the write off to MS.

You're right that its a $1b charge, but likely all that means is that its a up-front recognition of estimated future costs.

[Steve W]

I'm wondering how this will impact Xbox 360 sales. It's been considered a fairly unreliable machine up 'til now, so maybe Microsoft hopes they can get a sales boost by letting people know they're covering their hardware for the long haul.

[gepeto]

No offense, but I don't think you understand. A dollar lost is a dollar lost, except for the fact that there is less profit to tax, as you say (which is where the 30c to 50c savings comes in).

I'm sure that they do have the best possible professional advice, but with a company that makes as much profit as MS the goal would be to get the profits into a low tax rate jurisdiction which would *lessen* not improve the value of the write off to MS.

You're right that its a $1b charge, but likely all that means is that its a up-front recognition of estimated future costs.



Here is a great definition I found on write offs.

A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues.

For example, if you spend money on dinner to take out a client, that meal is a possible write-off towards your income because you presumably discussed business opportunities during the dinner. Suppose, for another example, you made a sale on credit to a customer, but two weeks later the client's business declared bankruptcy and became completely unable to pay off the credit account with you. This uncollectible debt would then be written off by your company and recorded as an expense by accountants.

[Trebuken]

I'm sure they are at least somewhat concerned by it. The stable stock price just means that investors weren't surprised by it. The games division losing bucketloads isn't exactly news.

Yeah that makes sense.

Another interesting tidbit I read in the recent OXM is that the original Xbox lost $3.7 billion over four years due to the cost of the hardware. That's equivalent to the loss they are taking with the difference that they are selling more than the original Xbox. I also read that the Elite 360 costs about $320 (estimated) to produce and that they are definitely turning a profit on the $479.99 system, which is something the original Xbox never did. The original was losing money even at its end which is part of the reason Microsoft pulled support for it so soon.

[Bronty-2]

Well, I am aware of what a write off is. I did pass the CPA exam and the Canadian equivalent. I'm a tax accountant for a living. Everything you quoted below just states what you already said, that losing money means there is less profit to tax. Which means you save the tax. Saving the tax at say 30 cents still sucks when you lost a dollar in the first place.

I don't mean to pick on you so I'm sorry if it comes across that way. I just don't get why a lot of people don't understand that you don't make money by losing money and creating writeoffs, no matter who you are - MS or the corner store ;)


Here is a great definition I found on write offs.

A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues.

For example, if you spend money on dinner to take out a client, that meal is a possible write-off towards your income because you presumably discussed business opportunities during the dinner. Suppose, for another example, you made a sale on credit to a customer, but two weeks later the client's business declared bankruptcy and became completely unable to pay off the credit account with you. This uncollectible debt would then be written off by your company and recorded as an expense by accountants.

[jonjandran]

Well, I am aware of what a write off is. I did pass the CPA exam and the Canadian equivalent. I'm a tax accountant for a living. Everything you quoted below just states what you already said, that losing money means there is less profit to tax. Which means you save the tax. Saving the tax at say 30 cents still sucks when you lost a dollar in the first place.

I don't mean to pick on you so I'm sorry if it comes across that way. I just don't get why a lot of people don't understand that you don't make money by losing money and creating writeoffs, no matter who you are - MS or the corner store ;)

I think sometimes it needs to be put more simply. I always get told by people " Just buy equipment for your business. Since it's a write-off it's like getting it for free".

So put simply , it's like this.

1st scenario----I make $100. I pay around 30% in taxes. Tax is $30. So I make a net of $70.

2nd scenario---I make $100 . I buy a piece of equipment for $10. I now pay tax on $90. Tax is $27. So I make a net of $63. $100 minus the $10 I spent on equipment minus the $27 in taxes.

So yes I paid less in taxes but I lost money in the long run. Now the difference between me and Microsoft is I have a piece of equipment. But after Microsoft spends 1 billion on these repairs they won't have anything.And does anyone really want this to hurt Microsoft so bad they decide to quit the hardware business like Sega ? I know I don't. I like the Xbox and Xbox360.

[Mangar]

(shrug)

I tend to think that the long-term goodwill that such a move will develop, will easily offset the 1 Billion dollar cost. Especially since the cost is an estimate, and most likely greatly exaggerated. Try and keep in mind, that Microsoft garnered lots of free press and free advertising both on TV, Newspapers, and various media outlets with this plan. The way it was reported in many of of the stories i read, say NOTHING about the various problems with the X-Box 360, and instead only highlight that Microsoft is taking a cut in profits to extend their warranty.

It makes them look Pro-Consumer, and makes the average non-Internet forum reading Joe feel better about their previous purchase, or even give consideration to purchasing an X-Box 360 in the future. What other console can they buy, where they **KNOW** that their purchase is insured for at least 3 years with no added 150$ warranty plan that most stores try and sell you for any major electronics purchase?

[chrisbid]

im under the impression that the three red light problem is a simple and inexpensive fix (there have been rumours that a different heat sync arrangement fixes the problem). If they write off a billion dollars for warranties, that does not mean that all 1 billion will be claimed over the terms of the warranty.


by extending the warranty (which only applies to the three red light failure btw), MS gets good pub for admitting to their mistake, though one would think there wouldve been some product testing before launch, and sooner than 18 months post launch to discover and fix a widespread problem.

[CreamSoda]

Ok, maybe I don't understand but does this mean that M$ will fix my 360 for free? Even though I bought it just after launch so my warranty is long expired.

And yes it does have the famous red ring of death... -_-

[Ed Oscuro]

Ever seen what they charge for their computer software?

$300+ for Vista Ultimate?
$270 for XP Pro?
Who needs Ultimate?

I got Win XP Pro with a Vista Business coupon (32-bit edition, downloaded the 64-bit upgrade disc for use whenever I feel like going through with the upgrade) for something like $260 (I'm guessing, given that's what Vista B. costs right now on Newegg, which is where I got mine). Not too shabby.