Analysts said the warranty-and-repair program essentially added $100 to Microsoft's cost for each of the consoles sold since the Xbox 360's debut in November 2005. Microsoft sells its consoles for $299 to $479, depending on the size of the hard drive.
Because the charge is being taken during the company's just-ended 2007 fiscal year, Microsoft still expects its Xbox division to be profitable in the current one.
Its shares fell 3 cents to $29.99 in regular trading, then slipped to $29.88 in extended trading.
"Microsoft has a lot of inventory in the channel, and all of it is probably subject to this failure," said Van Baker, vice president and research director at Gartner Inc.
Analysts chalked it up to an expensive learning experience for Microsoft, which rose to prominence in the high-tech industry by making software, not hardware. With the exception of mice and keyboards, Microsoft started manufacturing computing hardware only when it launched the first Xbox in 2001.
"This is the problem of a company that has not been historically a large-scale manufacturer of a consumer electronics product," said Michael Pachter, an analyst with Wedbush Morgan Securities. "These are the growing pains that you have when you're learning how to do that. It's good they're facing the issue head-on and not running away from it."
Richard Mitchell, lead writer for the Xbox 360 Fanboy blog, said concerns about the "three rings of death" had kept some gamers from buying the console. "The three-year warranty will go a long way toward assuaging their fears," he said.
But some Xbox owners aren't fully appeased, including Dustin Burg, a 21-year-old from St. Cloud, Minn. He is on his third Xbox 360 console -- the first succumbed to the flashing three red lights and the second had a faulty hard drive.
"I really do think Microsoft is trying their best to make things better for their customers," said Burg, who said Microsoft replaced both consoles and paid for the shipping charges. "At the same time, I feel they're not being 100% upfront about telling us what's wrong with the box."
Peter Moore, vice president of Microsoft's interactive entertainment business, declined to describe the cause of the problems other than to say that they involved a number of issues with the hardware.
Microsoft said Xbox 360 owners with questions about the warranty program could call (800) 4-MY-XBOX (469-9269) or visit www.xbox.com.
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alex.pham@latimes.com
