On the eve of the big (though decidedly more intimate) Electronic Entertainment Expo (E3) next week in Los Angeles, Microsoft drops a bombshell: all those bloggers complaining about the hardware crashes on Xbox 360 were heard in Redmond, Washington. Microsoft will set aside between $1.05 and $1.15 billion dollars to cover a new, 3-year extended warranty program to cover repairs for the device.
But after a conference call yesterday, we now know the Xbox problems go far deeper. Microsoft also confirms that it will miss sales targets again on the Xbox: 11.6 million units sold on the quarter instead of the 12 million that were expected. And that 12 million comes after the company's earlier, original forecast of 13 to 15 million.
It gets worse: Microsoft also says the entertainment/device division lost another $315 million.
But in his only broadcast interview about all this, the president of the division Robbie Bach reaffirmed to me that his division will be profitable, as scheduled, by next year. "Absolutely," he tells me. He acknowledges the severity of the technology glitch, but won't say how many units have needed repair.
"Clearly, when you take the financial charge we took today of $1 billion, we clearly take it seriously and it's a significant thing," he says. "We're willing to take that because we want to do the right thing there." Beyond the doom and gloom of the conference call, Bach says he's more than optimistic about how Xbox is performing.
"You look at the attach-rate, that's the number of games we sell for consoles, and that's an all-time record for this stage in a console's life. You look at Xbox Live, our online service where we continue to add customers hand over fist, and you look at the line-up for the next 12 months, any of that data, and the recommendation rate we get from customers says that the business is in great shape from a fundamentals perspective and that the next 12 months will be a good 12 months and we will be profitable in that period," Bach says.
Good news, but not enough to help Microsoft meet sales expectations. At least not yet.
In my next post, I'll examine the challenges Microsoft faces from a competitor it probably wasn't counting on.
Questions? Comments? TechCheck@cnbc.com