Today Microsoft announced that they would be extending the warranty to 3 years for their Xbox 360 consoles, in effect taking an anticipated 1.05 to 1.15 billion dollar pre-tax charge to the earnings for the quarter ending June 30, 2007 for the costs that it will incur under the new enhanced warranty policies. I'm not a professional analyst, but doesn't this seem fishy to anyone else? I'm putting on my conspiracy theory hat now, so if you want to take Microsoft's word at it, go right ahead and skip the rest of this entry, but if you want to hear my theory, read on...
Yes, everyone is aware that XBox 360s overheat and burn themselves out. There's even a person who has claimed that he's had 12 different XBox 360s sent to him as replacements. But, 1.05 to 1.15 billion dollars in a pre-tax charge made BEFORE the announcement of this change in the warranty policy makes me think that something else is going on.
Let's take a quick look at the numbers. An XBox 360 Core costs $300, and a XBox 360 with a 20GB hard drive costs $400. 1.05 to 1.15 billion dollars is enough cash to buy 2.9 million to 3.8 million new XBox 360s. Since these are merely warranty issues, meaning a replacement of a few parts and cost of sending it back, it could be several times that number, and presumably enough to cover the 10.4 million XBox 360s out there right now. To make this plan work, that means that Microsoft is willing to spend $110 per XBox 360 in warranty and repair costs, which seems to indicate a 1 in 4 failure rate for the XBox 360 over a 3 year period of time. Keep in mind that I'm working with retail costs of an XBox 360 -- their true cost of what it costs to Microsoft is likely less, but still, they're prepared to spend a fourth to a third of the cost of a new system on each one.
So here's the conspiracy: what if this charge is really to hide something else that they released as an entertainment product and bombed? Something, you know, like a media player that no one really bought?
UPDATE: Apparently the XBox 360 has a 25 to 33 percent failure rate. Perhaps they are wise to allocate 1 billion dollars for it, but upfront? And before the announcement of the change to the warranty plan? Something still doesn't sit right with me.
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