In a release and subsequent investor conference call yesterday evening, Microsoft has owned up to the high failure rate of the 360, increasing the warranty against failures that bring on the dreaded three "red lights of death" to three years. Since Microsoft claimed that this additional warranty—which is retroactive and comes with a promise to refund anyone who has paid for repairs—will cost them between $1.05 to $1.15 billion to implement, they naturally felt like they had to involve the investors and clear the air about this monstrous cost. The ensuing conference call shed some light on this announcement and how Microsoft will deal with this issue moving forward.
Robbie Bach, the president of Microsoft's entertainment and devices division, began his portion of the call by saying they are selling "lots" of games while adding many consumers to Xbox Live. "The fundamentals are good," he said, but he admitted  that they weren't happy with the number of defective units. "The number of repairs to Xbox 360 consoles have been unacceptable to us," he goes on, claiming that there are a number of reasons for these "general hardware failures."

This isn't the first time Microsoft has beefed up their warranty: an earlier extension of the system's warranty to one year also pointed to more hardware failures than Microsoft was willing to admit. Chris Lidell, Microsoft's chief financial officer, also noted that the $1 billion (plus) cost for this warranty increase is budgeted to cover every console that has been produced and sold so far, as well as new systems sold moving forward. With 11.6 million units shipped through June, that's allowing for a warranty cost of around $86 per system.

While they won't share the specific numbers of affected units, they do say it's a "meaningful number," claiming that they understand why the issue was happening and that they have made engineering changes to keep these issues from happening again. Whether they're talking about the new heatsinks people have been seeing in their systems or something new is unclear.

"Since it's multiple things, I hate to even point at design," Robbie Bach says about the defects, claiming that they're proud of their partners, and this issue is Microsoft's responsibility to fix. When asked if this is something they've been able to engineer out of the system, Bach's response is a firm "yes." 

The $1 billion charge goes onto the fiscal year 2007, which allows Microsoft to claim that the entertainment and devices division will be profitable in fiscal 2008. While that may be the case on a year-to-year basis, this is a huge hit for the division. This move may have headed off a class-action lawsuit against the console manufacturer, but it also serves as Microsoft's admission that the 360 has major reliability issue.

The response on our own forums following this announcement seem to be positive, with some gamers bitter that it took so long for the issue to be addressed. Moving forward, this may help gamers feel confident in their 360 purchases, or it could serve as proof to naysayers that Microsoft has been less than forthcoming in dealing with hardware failures. It remains to be seen if the engineering fixes to the system will cut down defective 360 units in the future. If Microsoft is able to enter the holiday season with these updated consoles, the new 65nm process, and perhaps a price drop, they could see an increase in sales for their efforts.
ars technica