Glitches in XBox 360 hit Microsoft's reputation

MICROSOFT today admitted it faced a bill of more than £500 million to cover costs of "an unacceptable number of repairs" to its Xbox 360 video game consoles.

While the cash cost may not be detrimentally damaging to a company of Microsoft's size, much more impact could stem from damage to its reputation in an increasingly competitive fight with rival console makers such as Sony and Nintendo.

The US giant has come under pressure after complaints about Xbox 360 failures mounted, with affected customers now being given a free three-year warranty, the company said.

But in addition to that, it has also missed shipment targets for the end of June and faces growing expectation that Sony is set to slash the price of its rival PlayStation 3 console at a video game exposition next week.

Microsoft has not given an exact number of machines that have been hit by the hardware problem - indicated by three red flashing lights on the console - but has said the amount was "bigger than we are comfortable with".

The move will also see customers who paid for repairs attributable to the three flashing lights after initial warranty expired reimbursed.

Billionaire Bill Gates' company said the move was aimed at maintaining customer loyalty.

Robbie Bach, president of Microsoft's entertainment and devices division, said: "The majority of Xbox 360 owners are having a great experience with their console and have from day one. But this problem has caused frustration for some of our customers and for that we sincerely apologise."

Mr Bach denied it was related to a potential move by Sony. He said: "This is just one of those things that happens when it happens. We will assess what we do with pricing and other aspects of our business based on our own business."

But despite the difficulties, Microsoft said the unit was still expected to make a profit over the current financial year.

So far Microsoft, best known for its Windows software, has the lead over Sony in the battle for high-end video game machines.

However, it shipped only 11.6 million 360s by the end of June, compared with a target of about 12 million, chief financial officer Chris Liddell said.

Microsoft cut its forecast for Xbox 360 shipments in January, having previously forecast shipments of 13 million-15 million by the end of June.

The hardware issue has marred the success of the Xbox 360, which has built an early lead over Sony's PlayStation 3 with Microsoft's strong line-up of games and popular online service.

But it is finding increasing competition for some parts of its business, such as Apple's incursion into TV shows delivered over the internet, which is also a feature of the Xbox online service.

According to Microsoft, investigations have revealed "a number of factors" sparking console failures. Mr Bach said some factors took time to reveal themselves hence the growing numbers since the machine's release.

Kim Caughey, senior analyst at Fort Pitt Capital Group, said: "What you have to ask yourself is, should Microsoft be in the hardware business?"