What did they know, and when did they know it?

The focus of my initial post on the latest Xbox fiasco was primarily on the seemingly endless trail of management incompetence. In thinking about the issue further, I'm not sure that's enough. In fact, I'm wondering if this situation isn't potentially far more serious, possibly even actionable. I'm also wondering if my initial inclination to discount calls from commenters for an SEC investigation was right, and whether that may not be a possibility after all - or at least a risk.

It's one thing to stonewall and put a positive spin on bad news. We might disagree on the extent to which that should be condoned, but it's not illegal per se and is unfortunately commonplace. It's another thing entirely, however, for the executive officers of a public corporation to knowingly make false statements to media and analysts, attempt to conceal material information from shareholders and possibly even from reported financials, or remain silent while seeing others engage in that behavior. At best, it is unethical/unacceptable and risks a shareholder lawsuit. At worst, it raises the specter of a full SEC investigation and resulting charges/fines/restatements if found guilty - not to mention shareholder lawsuits.

Determining which we're dealing with here, seemingly hinges on answers to a relatively short list of questions, none which MSFT has addressed publicly, but all of which the Board could easily determine (more on that later). They include:

1. What is the overall Xbox 360 failure rate due to manufacturing defects/design shortcomings?
2. When did it first become "unacceptably high"?
3. What was the "acceptable" threshold and how does it relate to industry norms?
4. If it is significantly higher, what is the justification for the delta and who authorized it?
5. To whom was the abnormal failure rate information communicated and when?
6. What actions were taken to address the problem, by whom, and when?
7. Were any of the subsequent remedial changes recommended during the initial design and/or manufacturing process? If so, which ones, why were they ignored initially, and who authorized it?
8. Was proper accelerated life testing done before launch? If not, why not? (FWIW, Bach says it is being done now).

Here's a very cursory and incomplete review of event chronology:

November 2005: Xbox 360 is launched

• Shortage of available units is blamed on insufficient manufacturing ramp up time. Others later charge that this was a result of - or at least exacerbated by - low yield, which itself should have acted as a warning of future problems.


• Articles detailing how to fix the overheating problems begin to appear almost immediately.


• MSFT's own Mini-Microsoft does a post on the topic of overheating and red circles (later called Red Ring(s) of Death or RRoD), which turns out to be rather prophetic.


• MSFT responds with:

The vast majority of Xbox 360 owners are having an outstanding experience with their new systems.

December 2005

• Robert Byers, a Chicago man who purchased the Xbox 360, files suit in a federal court accusing Microsoft of selling a defectively designed product.

September 2006

• September 22, 2006, MSFT admits to problems with some early units, waives the cost for repairs on all Xbox 360 consoles made before January 1, 2006, and refunds any fees already paid.
  
• By this point, MSFT has a full page dedicated to the issue on its web site, and RRoD is one of the command prompts on the support line.

June 15, 2007

• Todd Holmdahl, Microsoft’s corporate vice president of Gaming and Xbox Products Group, does his best to deny there is any abnormal failure rate, claiming the issue is limited to a "vocal minority".

July 5, 2007

• MSFT admits the problem, calls the number of failing units "unacceptable", changes the warranty for RRoD specifically, and takes the $1B+ financial charge.


• Peter Moore, Corporate Vice President, Interactive Entertainment Business, Entertainment and Devices Division, indicates that they began investigating this just "weeks ago".


• Robbie Bach, President, Entertainment and Devices Division, states that:

For a little over the first year this problem, or this set of issues, wasn't visible at all.

• MSFT adds that:

The majority of Xbox 360 owners are having a great experience with their console...

[Hmm...that last one sounds familiar somehow. Only "vast" got dropped from majority, and "outstanding" is ratcheted down to just "great". Is MSFT legal doing some advance damage control?]

Given the scope of the problem, resulting financial charge, and potential risk of future legal and/or SEC exposure, common sense - not to mention fiduciary responsibility - argues that the Board of Directors get involved to satisfy themselves that appropriate, defensible answers are forthcoming to the questions above. And not wrt word-games about the meaning of "minority", or wasn't visible for "this set of issues". But on the core topic of overall reliability vis a vis industry norms, and MSFT's resulting actions. Specifically, Moore is quoted stating that:

The information that we knew we had a bad box, we kept shipping it. That’s completely wrong.

The Board needs to determine if that is accurate, using generally accepted industry standards for failure rates as the hurdle. If it is, great. Although by way of full disclosure, I should add that I'm beginning to seriously doubt that is the case. Even if it is, there seems to be no interpretation under which Holmdahl isn't guilty of being hopelessly deceitful when he made his statements defending Xbox reliability three week ago. As such, he needs to be severely reprimanded or fired.

If, on the other hand, those acceptable answers aren't forthcoming, then it's very serious. Under that scenario, imo, every senior manager who knowingly tried to conceal the problem, made false and misleading statements, and/or stood by while they were aware of others doing so, should be fired - period. If that includes Ballmer, he should step down. If charges should have been taken earlier, or shouldn't now be taken as special one-time ones, then bite the bullet and restate/change future guidance accordingly.

Shareholders deserve a clear assurance that management acted appropriately in this matter and can be trusted. The current leadership word-games, unwillingness to detail the specific nature of the issues, and refusal to confirm whether overall failure rates are at or below industry norms, is not providing that. Will the Board act to fill the gap?

Update: Related.

• Confession is Good For the Soul: Why Microsoft Must Be More Forthcoming About the Xbox 360's Flaws--Or Initiate a Recall
• Microsoft sued over Xbox 360 (this time for the other widely-reported problem: disk scratching)
• Bach Sold Stock as Xbox Problems Mounted
• Microsoft casually dismisses hardware complaints
• Xbox 360 Recalled by EB Games Australia
• Microsoft exec under fire for selling stock

Update #2:

• Moore leaves MSFT