Microsoft, Xbox, and One Small Mistake: Loss of $1 Billion

Microsoft incurred the loss of a whopping $1 billion due to a small design flaw in one of the most successful products, Xbox 360. In his latest book, Robbie Bach, the former head of Microsoft's Entertainment & Devices Decision reveals some stunning facts.

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Microsoft Corporation (NASDAQ:MSFT) needs no introduction as it is one of the oldest players in tech space and dominated the industry undisputedly for almost two decades when it comes to valuation. However, the enormous public image comes with great responsibility. While Microsoft’s have added many feathers in its cap over the years, it’s their blunders that generate more attention.

Whopping $1 billion is the amount the company lost due to a mistake it made with one of the successful products. And, it all started with the launch of Xbox.

At the beginning of the Millenium, Microsoft forayed into the gaming console market with its brand Xbox. The sub-brand debuted towards the end of 2001 with the Xbox gaming console. This was a first in the American gaming market after the only other American company offering consoles discontinued their product in 1996.

The first generation of the Xbox sold well and created the potential for expansion. 4 years later, in 2005, the Xbox 360 was launched, marking the beginning of the second generation of the gaming console.

The market was competitive with the likes of PlayStation and Nintendo Wii, both well-seasoned gaming brands, as competitors that were also working on launching a new generation of their products.

Microsoft, however, managed to release the Xbox 360 a year before its competitors due to successful test runs.

The Red Ring of Death: a Major Setback

Despite a successful trial period, the consoles presented a widespread problem once they had been in the market for a few months.

Many users reported running into the “Red Ring of Death” (RRoD) which appeared around the console’s power button after which the console would shut down and not start back up.

In his book, “Xbox Revisited: A Gameplan for Corporate and Civic Renewal,” Robbie Bach, the then head of Microsoft’s Entertainment & Devices Decision, opens up about how the company dealt with this problem.

Because the RRoD was not a problem engineers encountered during the testing period, the company was at a loss for how to deal with this problem.

Eventually, Microsoft resorted to extending the warranty of the product to 3 years and replaced every Xbox that ran into this problem.

Through the book, Bach reveals that coming to this decision was extremely difficult for the team responsible for solving this issue, which included him.

Investigations, however, proved futile and no apparent pattern emerged among the affected devices, such as being a part of the same production batch.

Bach writes that the decision was the biggest one he had to make in the two decades he worked at Microsoft.

Loss of $1 Billion: The Culprit

The problem users ran into turned out to be the result of overheating.

It was inferred that the design of the Xbox 360 was such that it didn’t allow for proper heat elimination and consistently prevented the system from cooling down during use. This also explained why the issue did not turn up during tests.

Bach reveals that this was a huge oversight on the part of the company, as the design of the outer shell of the Xbox 360 took precedence over its efficiency. This was a conscious decision on the part of the company due to the bulky look of the previous model.

Due to the flaw in the design of Xbox 360, Microsoft could do little to fix the problem in the current edition of the product, making resorting to replacing items their only option. This decision ultimately cost the company around $1 billion, a larger than normal sum usually required to fix product issues.

Microsoft then worked to come up with a better design for the Xbox 360 ‘S’, the successor to the Xbox 360. This console launched 5 years later in 2010.

While the issue made a huge dent in the company’s reputation at the time, the Xbox has recovered its credibility and had an estimated 64 million monthly active users in Q4 2019.

Microsoft also announced the fourth generation of the gaming console, the Xbox Series X, which is set for a late 2020 launch. The closest competitor Sony PlayStation 5 is also set to launch around the same time. Both companies boast of many new features that will come with the new products. Based on preliminary info, experts believe the Ps5 will have better performance, but given Microsoft’s long-standing prowess, it can be hoped that nothing like the RRoD plagues users once again.


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