Report: MS Knew About 360 Defects Before Launch

Investigative report says the 'RROD' defect kept Microsoft from originally planned price cuts.

Call us crazy, but we suspect most Xbox 360 owners are by now well familiar with the dreaded Red Ring of Death -- maybe you haven't suffered through it 11 times, but odds are you or someone you know has likely dealt with Microsoft customer support at some point in the last three years. Now, a new report by VentureBeat's Dean Takahashi (author of the behind-the-scenes books Opening the Xbox and The Xbox 360 Uncloaked) contends that Microsoft knew about the issue before the 360's launch, but refused to delay the release in order to beat their competitors to the market. And that decision, the report claims, has kept Microsoft from marketing and pricing the 360 as aggressively as they would have liked to.

The report (which Takahashi calls "unauthorized" but assures is well researched and several years in the making) paints an overall picture of Microsoft rushing through the Xbox 360's initial design and manufacturing, without heeding warning signs that the hardware was suffering from potentially serious defects. "It turned out in the end that this was all going too far, too fast," says one anonymous source about the 360's design process. "They were adding too many features after things were locked down. That incremental feature adding just made it fragile." The report claims (although Microsoft refused to confirm these figures) that as Microsoft went into full production in August of 2005, they had a staggeringly high 68 percent defect rate -- that is, for every 100 Xbox 360s they manufactured, 68 were duds.

But the more interesting point raised in the report is that Microsoft's gamble to continue toward launch (expecting the hardware issues would quickly work themselves out over time) has apparently kept them from pricing the Xbox 360 where they originally wanted it to be at this point in its lifecycle. "The quality problem negated much of the advantage of going first, and it has delayed the company's plan to aggressively market the console and slash its prices," Takahashi writes. "That has stopped the company from reaching the broader market of consumers that Nintendo has won over. It has lowered its ambitions, hoping instead just to get a clear edge on third-placed Sony. The future profits that the company once hoped for are now likely to wind up in Nintendo's pockets."

But Robbie Bach, current president of Microsoft's Entertainment and Devices division, maintains that being first to market was the right decision. "If you take the question of whether it was the right thing to try to be first, the answer to that is definitely yes," Bach says in the report. "It has given us a leg up in a number of places that are super important. It has given us a leg up with game developers. It has given us a leg up from an economics perspective. It helped us expand Xbox Live quickly. At a strategy level, if you asked if we wanted to be first again, I would say yes. It's easy for me to go back and say, if I knew what would transpire over the next two years, would I go back and do something different, I think that's an obvious answer. But the fact is, based on the data we had at the time and all the hard work we put into it, there was no way to see what actually happened."

It's an interesting statement, in that Bach is saying they made the right decision, and yet he also admits they would have done things differently knowing what they know now. And what Microsoft knows now is that whatever intangible gains the defects may have cost them in keeping them from cutting their prices more aggressively, the defects did cost them a very tangible $1.15 billion dollars as a result of extending warranties for the RROD problem in July 2007. "Would I like the billion dollars back? Of course, the answer is yes. But there is still plenty of economics in the business for us to be successful," Bach says.

But with all models of the Xbox 360 just this week receiving a new wave of price cuts (putting the Arcade unit $50 cheaper than the Wii), it's fascinating to consider Microsoft may have actually intended for their hardware to be even cheaper at this point in the lifecycle. Could that have drastically changed the current standing in the so-called console wars? It's impossible to know for sure, but it sure is a fun "what-if" to ponder.

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