Xbox games console's red ring of death costs Microsoft $1bn

Microsoft is paying out more than $1bn (£497m) to repair chronic problems with its Xbox 360 games consoles, which break down in a fault known as the "red ring of death". The Seattle-based company said last night it had been forced to make an "unacceptable number of repairs" to the machines, which went on sale in 2005.

The fault triggers three flashing red lights on the console, indicating a general hardware failure. On internet messageboards, the problem has been dubbed the "red ring of death", or "bricking", because the machine becomes no more useful than a brick. Microsoft has decided to extend warranties free of charge to cover a period running for three years from the date of purchase, following widespread complaints. The company will reimburse anyone who has paid for repairs to date.

Microsoft said the clean-up would involve a charge of between $1.05bn and $1.15bn to its earnings for the financial quarter which ended in June.

Robbie Bach, president of Microsoft's entertainment and devices division, offered "sincere apologies" for the problem. The commpany has not revealed the number of failures, but such was the volume of repairs that one British firm, Micromart, recently announced it would not take any more Xboxes, saying it was getting a "phenomenal amount" of machines coming in with the same issue.

The write-off is a big blow to Microsoft's efforts to diversify from its traditional strength in software with products such as games consoles and a music player, the Zune, a competitor to Apple's iPod.

The Xbox faces stiff competition from Nintendo's Wii and Sony's Playstation 3. Last Christmas, Microsoft said it had sold 1.13m Xbox consoles in the US during December, securing a 51% market share.

But in a surprise downgrade, the company told investors in January that it was lowering its sales expectations for the year to June to 12m sales, compared with previous forecasts of between 13m and 15m, citing an oversupply of stock among retailers.

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