LOS ANGELES Microsoft Corp. (MSFT.O) 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.
Microsoft is under pressure with mounting complaints about Xbox 360 failures on the Internet and growing expectations that Sony Corp. (6758.T) could slash the price of its rival PlayStation 3 console at a video game exposition next week.
So far Microsoft has the lead on Sony in the battle for high-end video game machines, but it shipped only 11.6 million 360s by the end of June, compared with a target of about 12 million, Chief Financial Officer Chris Liddell said during a conference call with analysts on Thursday.
Robbie Bach, president of Microsoft's entertainment and devices division, said the timing of the announcement about the charge for the quarter ending in June and a new extended warranty were unrelated to any potential move by Sony.
"This is just one of those things that happens when it happens," Bach said in an interview. "We reached our conclusion early this week and because it's a financially meaningful issue we had to announce it immediately."
The hardware issue has marred a string of successes for Xbox 360, which has built an early lead over the PlayStation 3 with Microsoft's strong lineup of games and popular online service.
But it is also finding increasing competition for some parts of its business, such as Apple Inc.'s (AAPL.O) incursion into television shows delivered over the Web, which is also a feature of the Xbox online service.
RED FLASHING LIGHTS
Microsoft said it had investigated the sources of hardware failures indicated by three red flashing lights on the console and had identified "a number of factors" that can cause such failures.
Bach said many of those factors took time to show up in the consoles, explaining why the number of repairs had grown in the second year of the Xbox 360's release. He would not say exactly how many Xbox 360s had been returned due to hardware issues except that "the number is too large."
The company said it would extend warranty coverage to three years to cover the problem and would reimburse customers who had previously paid for repairs related to the three-flashing-lights error message. It also said it has made improvements to the Xbox 360 console.
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.