Xbox glitches cost Microsoft

Microsoft Corp. said glitches with its Xbox 360 game console will cost as much as $1.15 billion to repair and that the device missed its sales forecast, signs the company may struggle to keep pace with Nintendo Co.

Microsoft, the world's largest software maker, said Thursday it will record expenses of $1.05 billion to $1.15 billion in its last quarter to extend the Xbox 360's warranty after an "unacceptable" number required repairs.

The quality problems may hinder Microsoft as it strives to catch up with Nintendo's Wii in game machines. The Wii has outsold the Xbox every month since reaching U.S. stores in November. Sony Corp., whose PlayStation 3 ranks behind the Xbox in console sales, also may capitalize on Microsoft's setback.

"This is a gift horse to Sony and Nintendo," said Matt Rosoff, an analyst at research firm Directions on Microsoft in Kirkland, Wash. "If there was a perception that the Xbox isn't a good-quality product, this tends to confirm it."

Shares of Redmond, Wash.-based Microsoft fell 2 cents to $29.97 Friday in Nasdaq Stock Market trading. They have gained 28 percent in the past year.

Microsoft missed its forecast for Xbox unit sales for the fiscal year just ended, Robbie Bach, president of the entertainment and devices unit, said Thursday in an interview. The company has sold 11.6 million machines since the Xbox 360's release in November 2005, missing its target of 12 million. It initially forecast sales of as much as 15 million.

"In terms of people's purchase intentions, the Xbox 360 just fell to the bottom of the league," said David Garrity, director of research at Dinosaur Securities Inc. in New York. "Microsoft was confronting a rising tide of consumer discontent."

Microsoft pledged last July to make the Xbox division profitable in the fiscal year ending June 2008. The unit has lost money since it began in 2001.

Bach said the company is still aiming for Xbox profit this fiscal year. 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.

The expense is enough money 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," Bach said. "When you look at the financial implication, obviously it's not a small number."