MSFTextrememakeover

Thursday, July 05, 2007

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:

28 Comments:

  • 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.

    This is always the case with inexperience. They *never* see it coming because they won't/can't open their eyes.

    The same executive dismissive denial that can hope a years-old $1B defect will go away unnoticed wouldn't take steps to identify (let alone correct) that defect when it was only months old and cost only a $1M.

    The problem may well be endemic all the way down the org. Management that is too inexperienced to prevent and correct problems is too inexperienced (and insecure) to staff up with people who will. The two mindsets and styles mix like oil and water.

    People who identify problems while they can still be econcomically prevented are all too often deemed the problem; not team players; not with the program; not "passionate" enough about the technology.

    Microsoft could use some people who are less passionate about technology and more passionate about profit and quality.

    By Anonymous Charles, at 6:52 AM  

  • As I recall, Bach has also been one of the more active MSFT insider sellers over the last year.

    Someone (hint, hint, nudge) might want to research Bach's insider filings vs other insiders and vs XBox 360 milestones/problems.

    By Anonymous Charles, at 7:53 AM  

  • It's a shell game. This year, they take $1B against profits. Over the next year, $.6B will be used to fix problems, and magically, xbox will show $.4 in additional profits for FY08, so that Bach's prediction of profitability in 08 comes true.

    Meanwhile, MSFT stays depressed under $30, so the cost of stock options is reduce.

    By Anonymous Anonymous, at 8:53 AM  

  • And, of course, Mr Bach will get his $1m+ partnership bonus for this amazing and stellar performance.

    Where the F*ck is the Board of Directors? And why do these buffoons (Ballmer, Bach) still have a job?

    By Anonymous Anonymous, at 8:55 AM  

  • I have a different perspective, for while I'm a stock holder I'm also a consumer that has experienced the RRoD on my 360. I'm also plugged into the console culture and the single reason MSFT didn't meet their projected 12M by the end of June was because of the RRoD. Talking to my younger cousins, various people on blogs or just reading comments there is a large number of consumers that want a 360 but are worried about getting the RRoD. As a stockholder this is worrying and for a division that I believe *will* be profitable I want MSFT to do whatever it can, even spill 1B from the coffers, to bring back the goodwill. Heck, even now the Entertainment division is one of the few that I actually still believe in.

    You highlight the discrepancy between the "no problem here, move along" attitude first taken then the "sorry, we made a mistake" of now and you do it as if you're shocked, which is odd. Companies of all ilks, even the much loved Apple, often first attempt a suppression line and that often works. Keep the people happy and don't let it spiral out of control, after all we're talking a huge audience of teenage kids, you need to do everything you can to not upset these people. They don't even understand the industry standard 3%-5%, much less anything higher. So while it doesn't feel "as honest" I don't see anything overly reprehensible. When needed Peter stepped up and said, "yeah, you smell the smoke, there's a fire, here's what we're going to do" and that's what counts.

    I believe this announcement will actually boost 360 sales, as a collection breath is let out by the consumers. What worries me a lot more than 1B spent to fix things are the *huge* wastes of money spent on legal, sending C & D letters to developers like Jamie of TestDriven.NET. Microsoft legal has grown into this twitchy senile Cerberus, snapping at every little thing and thus eating away at whatever bits of goodwill and positive PR Microsoft manages to eek out. They can't decide how to handle the open source world, their EULA's are as a vague as the Patriot Act and abused just as much. It's painful to watch and sometimes I'm almost ashamed to say I develop using Visual Studio, you get this "oh, you're not a real developer, you're just a Microsoft monkey" look.

    By Blogger Shawn Oster, at 9:29 AM  

  • "The same executive dismissive denial that can hope a years-old $1B defect will go away unnoticed wouldn't take steps to identify (let alone correct) that defect when it was only months old and cost only a $1M."

    Exactly. Well said.

    "Someone (hint, hint, nudge) might want to research Bach's insider filings vs other insiders and vs XBox 360 milestones/problems."

    I have a more expedient idea: fire Bach. It's long overdue. And while we're cleaning house...

    By Blogger MSFTextrememakeover, at 9:54 AM  

  • Bach's insider transactions: http://biz.yahoo.com/t/31/3855.html

    By Anonymous Anonymous, at 9:56 AM  

  • This is the end result of the "be first or die" attitude that MSFT had approaching the 360. This 3 red lights problem is one that some people had almost immediately and it is definitely a design problem and one that probably could have been found if they'd done sufficient hardware testing.

    I'm just curious how they can cram the costs of this program into last fiscal year when there's still going to be problems going forward.

    By Blogger James, at 10:01 AM  

  • MSFTextrememakeover: I have a more expedient idea: fire Bach. It's long overdue. And while we're cleaning house...

    I was also thinking any SEC scrutiny might finally get the attention of the BoD.

    By Anonymous Charles, at 10:22 AM  

  • "I'm just curious how they can cram the costs of this program into last fiscal year when there's still going to be problems going forward."

    Remember that timing of the charge and timing of the payment are not necessarily the same. Accounting rules do mandate trying to match costs with timing, and they'll argue this obligation arises primarily from previously sold units as well as recent production changes (modified Xboxes had already been appearing). Of course, the company's guidance to show a H&E profit in '08, timing of year-end employee grants/options (in case you thought releasing this info on a Thursday vs a Friday was a fluke), and the market's tendency to look forward not backward - likely also played a key role in their timing decision.

    By Blogger MSFTextrememakeover, at 10:55 AM  

  • I'm surprised I don't see more coverage of the sales numbers, which I find far more concerning. At CES in January, MS claimed that 10.4 million consoles had been sold. So, in six months (granted, the slowest six months of the year) Microsoft has barely managed to sell 1.2 million units? Ouch.

    There's no doubt in my mind that Nintendo is going to be the big winner this round. Bach proclaimed repeatedly that the 360 would be the winner of this generation, but he has done nothing but dig the Xbox hole even deeper.

    By Anonymous Anonymous, at 12:13 PM  

  • hey genius - CFO is Liddell not Connors and has been for a couple years.

    By Anonymous Anonymous, at 1:23 PM  

  • Important correction: the CFO is no longer Connors. It's Chris Liddell. Connors was, I believe, responsible for the company's longtime conservative approach to forecasting and accounting.

    By Anonymous Anonymous, at 1:40 PM  

  • Instead of blaming top management how about having some heads roll in Xbox Engineering?They're the ones responsible for this mess.

    By Anonymous Anonymous, at 1:44 PM  

  • Hi, I'm the person who's occasionally posted about the secret kill Sony strategy that I thought Microsoft was employing with Xbox. I just have to say, after this latest debacle, I've come completely around to your opinion.

    Fire everybody involved and get the hell out of the game console business. These guys are even less competent than MSN, and that's saying something.

    By Anonymous Anonymous, at 1:48 PM  

  • "hey genius - CFO is Liddell not Connors and has been for a couple years."

    Hey moron - I know that. Try doing a search for "Liddell" on the blog. But thx for the heads up. It was late when I wrote it and I guess old habits kicked in.

    By Blogger MSFTextrememakeover, at 2:26 PM  

  • That 1Up interview with Moore was just horrible. Quote:

    "1UP: In your open letter, you said that "certain improvements" have been made to the console. Can you elaborate on that?

    Not really, I'm not the technical guy."

    W...T...F? You just took a $1 BILLION charge on fixing this mess and you don't know what changes have been made to the console to solve the problem? Bull. Why is it so hard to simply tell everyone what the problem was? They waited so long to address the failures because they were gathering data? *boggle* Reports from failures due to heat have been around since the launch. It doesn't take THAT long to isolate problems. They avoided the issue for too long and the preception of the 360 is probably irreparably damaged.

    By Anonymous Anonymous, at 4:52 PM  

  • This is totally INSANE.

    Who is running the company???

    As a gamer and owner of XBOX 1 (went through two defective ones)and 360 (first one was DOA, and sencond one died on me 9 months into it), I appreciate what they are doing eventhough I am totally frustrated that I have to deal with this BS.

    As an employee I am depressed and scared. Where is the acountability?????

    What is going on????????

    Signed,

    Brown Bag Over My Head MS Employee

    By Anonymous Brown Bag Over My Head MS Employee, at 5:26 PM  

  • Microsoft: when will you learn not to get into business ventures that are not your core competency? Sigh.

    By Anonymous Anonymous, at 7:39 PM  

  • My guess is MSFT decides to extended the warranty not because they have integrity (otherwise would have done that long time ago). It's probably because they know class action lawsuits were looming and would probably cost them a lot more.

    By Anonymous Anonymous, at 8:05 PM  

  • Interesting blog!

    Ok, I'm a bit curious now (as a MS stockholder since unfortunately 2000)...Bach claims the Xbox division will "show a profit" in 2008, just like he predicted a couple years ago.

    And he is doing this by burying the whole 1.3 Billion or whatever into last quarter's earnings?

    And...we are all going to pretend that, when Bach proudly announces next quarter, that true to his word, he brought the Xbox division to profitability in just 2 years since Xbox360 was released, that he should be roundly applauded? And that the division is actually healthy? And Bach gets a raise?

    Uh...wtf?

    By Anonymous Anonymous, at 8:30 PM  

  • who's -> whose

    By Blogger Matt Chaput, at 12:31 AM  

  • "Instead of blaming top management how about having some heads roll in Xbox Engineering?
    They're the ones responsible for this mess."

    Yeah thats right! Fire the little guy for doing the right thing. There were plenty of warnings given to management from the Xenon hardware engineering team about product quality issues. They chose to launch anyways...

    By Anonymous Anonymous, at 12:08 PM  

  • Anyone notice the great flame battle heating up on Lisa Brummel's internal blog in response to Robbie's guest post? Loving it. How about a referendum to make him resign?

    By Anonymous Anonymous, at 3:03 PM  

  • Instead of blaming top management how about having some heads roll in Xbox Engineering?They're the ones responsible for this mess.

    No, the line engineers are not the ones responsible. No product design is perfect right off the drawing board. It takes testing and validation before problems like this can be found and fixed. The line engineers are not the ones who cut that part of the schedule.

    But, you'll probably get your wish. Some poor IC (who probably begged the org for a chance to fix the problem before release) will get an "underperformed/Limited" and have his career at MS end over this. Bach and all the managers who mismanaged the schedule and the response will be around to cash in the next round of SPSA grants.

    By Anonymous Anonymous, at 3:57 PM  

  • Appears that Peter Moore has gone AWOL.
    http://www.microsoft.com/msft/default.mspx

    Tuned into this supposed call at 7:30 this morning, there was the usual intro music then...silence. For 20 minutes. Left, came back, and the voice told me the event was "not available."

    Hm. I can't imagine why he wouldn't want to appear in front of financial analysts.

    By Anonymous Anonymous, at 8:30 AM  

  • How about a referendum to make him resign?

    -
    The bozo isnt going to resign. He and cronies are getting paid way too much for the value he and his cronies are adding.

    By Anonymous Anonymous, at 5:23 PM  

  • Microsoft tis really starting to disappoint in any product they deliver. They are just floundering around because of all the cash they had built up.

    By Anonymous billie, at 5:59 AM  

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