Microsoft (NASDAQ:MSFT) shareholders got one heck of an unwanted news item the other day. The company's Xbox 360 video game console has been experiencing unusually frequent failure issues -- so many, in fact, that the software giant plans to extend the system's warranty to three years to calm unhappy users.
To put it mildly, this is simply embarrassing. How could Mr. Softy drop the ball so badly? The anti-Microsoft crowd may laugh themselves silly at that question, but I'm serious -- I'm dumbfounded that Bill Gates and his minions didn't take their video-game brand as seriously as they should have.
This goes far beyond a reddening of the corporate face, alas. Microsoft stakeholders must endure a charge roughly valued between $1.05 billion and $1.15 billion, to be assessed in the fourth quarter.
Sony (NYSE:SNE) is having its own problems moving its pricey PlayStation 3 unit, so it probably has no time to laugh at its rival's misfortunes. But Nintendo's no doubt having a good chuckle here.
When you make high-end systems with prodigious processing power, you should be certain that you've worked out all the kinks before they go on sale. No one enjoys dropping a large sum of money only to see some flaring crimson LEDs -- the "red ring of death," as gamers have dubbed it -- that signal the end of your fun.
In contrast to Sony and Microsoft's high-priced, high-tech units, Nintendo's returned to the top of the video game heap with its simpler, inexpensive Wii, which compensates for prior-generation processing power with an innovative new controller and a wider potential audience. That's why the Wii is looking better and better to publishers such as Activision (NASDAQ:ATVI), Electronic Arts (NASDAQ:ERTS), and THQ (NASDAQ:THQI).
Granted, Microsoft's extended warranty program will help improve the Xbox 360's image and consumers' confidence, but it doesn't erase the memories of the many customers who've already had their units go belly-up. The brand has been hurt, forcing Mr. Softy to extend the warranty a second time. Yep, the original warranty on the Xbox 360's late-2005 release lasted 90 days; it was enhanced to a full year in December 2006.
Is this the end of Microsoft's Xbox 360? No. The company is doing the right thing, and this setback could be the kick in the pants it needs to fix its quality control issues. Still, I hope that CEO Steve Ballmer realizes that analysts and shareholders will harshly question this debacle. It'll only blow over once Microsoft finally produces a batch of Xbox 360s without significant failure rates. I do love Microsoft, but nevertheless, I think this is a disappointing time for its video game division.
Further fully functioning Foolishness:
Microsoft is a member of the Motley Fool Inside Value portfolio. Philip Durell is obsessed with finding stocks trading below their true value. Sign up for a free trial today to check out his market-beating methods. Activision, Electronic Arts, and Nintendo are members of the Motley Fool Stock Advisor recommendation list.
Fool contributor Steven Mallas owns shares of Activision. As of this writing, he was ranked 11,526 out of 31,669 rated investors in the CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.
