What's another $1B among friends?

The train wreck that is the current leadership team of Microsoft, continued their winning ways today. For months they have been stonewalling and denying that Xbox 360 had reliability problems despite widespread reports indicating otherwise. The latter had reached a crecendo recently, but have plagued the unit since its introduction. Today, they admitted the obvious: there is a problem and they are going to fix it. In other words, they finally did what most ethical, customer-focused, and intelligent management teams would have done from the start - told the truth and committed to making it right. But this is Microsoft, so honesty and fixing mistakes often takes longer and only occurs after massive external pressure is applied.

As someone who posted about how ridiculous it was for MSFT to continue ignoring this issue, I'm glad to see them finally step up. However, even I am amazed at the extent of the problem and the resulting price tag: $1.05B-$1.15B. No, that's not a typo. That's what MSFT says it's going to take to fix it. Oh well, what's another $1B+ when you've already invested some $24B to generate $5B+ in cumulative losses so far? Meanwhile, having crashed and burned in Xbox, blowing upcoming quarterly earnings and EPS for the year company-wide in the process, management decided they might as well air all the dirty laundry. So CFO Liddell slipped in that oops, they also missed their already downwardly revised guidance for Xbox 360 unit shipments - well, after an analyst noted the differential and asked him point blank about whether that was confirmation of a miss. Excellent. Combining the above, scratch one of the last remaining areas where MSFT's current leadership was still considered competent: conservative forecasting.

Returning to Xbox 360 failure rates, what are they exactly? MSFT still isn't saying. Here was the answer from Todd Holmdahl, Microsoft’s corporate vice president of Gaming and Xbox Products Group, three week ago:

I would go back and say the vast majority of people love their experience. We continue to go back and address all of these issues on a case by case basis. There is a vocal minority out there. We go off and try to address their issues as quickly and as pain free as possible.

Here it is today from Robbie Bach, president of Microsoft's entertainment and devices unit:

"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."

Todd and Robbie work in the same division and talk to each other, right? FYI, the MSFT press release calls the number "unacceptable". Directions on Microsoft analyst Matt Rosoff is quoted stating that the charge is sufficient to fix 2.5M units. Doing quick math, 2.5M on 11.6M total shipped would suggest a failure rate in excess of 21.5%. But there are numerous unkowns which could skew it higher or lower. Bottom line, it's far above the 3-5% rates considered "normal" for the industry. It's also MSFT's fault apparently (read inadequate design, not poor manufacturing):

Flextronics International Ltd. manufactures the Xbox 360. Bach said Microsoft takes responsibility for the problems and won't be seeking to replace Flextronics.

So what does Bach have to say overall? He'd like you to know that:

the issue was the result of a "complex set of factors'' and it would have been difficult to predict the problem in advance. The failures cropped up in the past few months and weren't apparent in the first year the machine was on sale, he said.

In other words, don't blame him even though he's in charge and gets paid $10M's per year - shit happens. Oh, and that teeny weeny fact that they've known about this for at least "the past few months" (if not 8-18) but were vehemently denying it as recently as three weeks ago? Well, er... did I mention that shit happens? But wait, he's not finished making a fool of himself:

"Our goal has been to have Xbox profitable in the coming fiscal year 2008," said Robbie Bach, president of Microsoft's entertainment and devices unit. "We don't think this changes that in any way."

Doesn't change that in any way? Is Bach retarded? First, they missed their already revised unit forecast for the year and took a massive unexpected charge. As a result, they blew what remaining credibility they had left - which after years of failures, losses, and missed profitability targets, admittedly wasn't much. On top of that, the runaway success of the Wii (and resulting need for MSFT to do something more aggressive on price) was already calling the validity of this '08 forecast into question. Second, the media and competitive fallout from this, including the fact that they may have sat on 20%+ failure rates w/o doing anything about it (except try to aggressively deny it), is going to be huge. It will undoubtedly have a negative impact on unit sales vs previous forecasts. Third, announcing on July 5th that you're retroactively taking a $1B+ charge for last fiscal, and then acting like this fiscal's results are unaffected, is simply comical - and disingenuous. Fourth, even if the division does show a profit on the year, what difference does it make now that Xbox (as an overall investment) goes from $5B+ in the hole to $6B+?

How many more similar fiascoes, obvious management lies, sales misses, financial hits, company credibility blows, and massive failed "investments" is it going to take before MSFT's Board of Directors steps in and demands real accountability and change on behalf of shareholders whose interests they are legally chartered with protecting?


Update: Related:

• Failure Rate: Xbox 360 High As 33% - Sony PS3 & Nintendo Wii Less Than 1%
• Mr. Softy's Extended Embarrassment
• MSFT Conference Call
• Open Letter From Peter Moore
• Microsoft’s Peter Moore sends memo to his troops on Xbox 360 “warranty enhancements”
• Peter Moore and Microsoft's Red Ring Woes
• Save Us, Nintendo (Motley Fool writing in Sept 2006)
  "It's a common flaw. Microsoft even has an entire page devoted to it, and it's also one of the prompts on its customer service line."