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Microsoft to Book Xbox Cost of Up to $1.15 Billion
July 5 (Bloomberg) -- Microsoft Corp. will incur pretax costs of as much as $1.15 billion related to repairs of its Xbox 360 video-game consoles and said sales of the machines missed its forecasts for the year.
Warranty coverage for the consoles is being extended after an ``unacceptable'' number required repairs, the company said today in a statement. Microsoft expects the move to cost $1.05 billion to $1.15 billion in the quarter ended June 30.
The setback may hinder Microsoft, the world's biggest software maker, as it strives to catch up with Nintendo Co.'s Wii, which has outsold the Xbox every month since going on sale in November. Microsoft pledged to make the Xbox division profitable in the year that began July 1 as investors have tired of losses incurred since 2001.
``It's a pretty big black eye,'' said Matt Rosoff, an analyst at Kirkland, Washington-based research firm Directions on Microsoft. ``It's certainly not going to help the Xbox compete against Nintendo and it may be the stumble'' that PlayStation 3 maker Sony Corp. needs to win sales.
Shares of Redmond, Washington-based Microsoft fell 8 cents to $29.91 in extended trading. They dropped 3 cents to $29.99 at 4 p.m. New York time in Nasdaq Stock Market trading.
Microsoft missed its forecast for Xbox unit sales for the year just ended, Robbie Bach, president of Microsoft's entertainment and devices unit, said in an interview. The company has sold 11.6 million machines since its release in November 2005, missing Microsoft's target of 12 million. Initially, Microsoft forecast sales of as much as 15 million.
Profit Goals Intact
Bach said the company is still shooting for Xbox profit in the year that began July 1. Microsoft has forecast total profit of 37 cents to 39 cents a share on sales of $13.1 billion to $13.4 billion for the quarter that ended June 30. The company reports earnings on July 19.
``You have to wonder how expensive the Xbox business is going to be,'' Rosoff said. ``This is another billion in the hole.''
The charge represents enough to fix 2.5 million consoles, Rosoff said. Bach declined to say how many have failed so far.
``It's a meaningful number and it's got our attention,'' he said. ``When you look at the financial implication obviously it's not a small number.''
Any customer whose console experiences a general hardware failure indicated by three flashing red lights will now be covered by a three-year warranty from the date of purchase. The previous warranty had been one year in North America and Asia and two years in continental Europe, Bach said.
