VIDEO GAMES - Xbox fixes to cost $1 billion - Microsoft plans to take a charge and extend warranties. The glitches could give the firm's rivals an opening.

Three flashing red lights are joining the blue screen of death atop the list of things that Microsoft Corp. customers dread.

Troubled by an "unacceptable number" of malfunctions in the Xbox 360, Microsoft said Thursday that it had set aside more than $1 billion to take care of customers who suffered from the "three flashing red lights" error messages.

"This is the largest warranty extension of its kind, ever," said Richard Doherty, research director at Envisioneering Group, a consumer electronics consulting firm in Seaford, N.Y. "In dollar terms, there's been nothing like this before -- not for television sets, not for DVD players, not for home stereos."

The admission of hardware problems also could prove costly to Microsoft's reputation. The software giant is counting on the Xbox 360 to help it establish as big of a beachhead in the living room as the company now has in the office, with its dominant Windows operating system.

With 11.6 million Xbox 360s sold, Microsoft is the early leader in the current generation of game consoles, letting its customers not only play games but also surf the Web, buy movies and communicate via television. But the glitches could provide an opening for its powerful rivals, Sony Corp. and Nintendo Co.

Microsoft said it would repair or replace all game systems that go on the fritz and reimburse customers who had their broken consoles fixed. It also plans to extend the warranty, from one year to three, for broken consoles.

"This problem has caused frustration for some of our customers, and for that we sincerely apologize," said Robbie Bach, president of Microsoft's entertainment and devices division.

As a result, Redmond, Wash.-based Microsoft plans to take a financial charge of as much as $1.15 billion for its fiscal fourth quarter, which ended Saturday.

The sum dwarfs the $429 million that Sony reserved last year to recall 9.6 million laptop computer batteries that could catch fire when overheated. Microsoft says the consoles pose no safety hazard and is not recalling them.

Microsoft declined to say how many of its consoles could be affected by the glitch, which causes the machine to freeze. But some analysts say the sizable financial charge indicates that Microsoft is expecting a high rate of failure.

"With the amount of money they're putting in reserves, it looks like they're expecting 1 machine in 4 to fail and require a warranty," Doherty said.