Microsoft said today said it would take a more than $1 billion charge to fix "an unacceptable number of repairs" to its Xbox 360 video game consoles and had missed shipment targets for the end of June.
Microsoft is under pressure with mounting complaints about Xbox 360 failures on the Internet and growing expectations that Sony could slash the price of its rival PlayStation 3 console at a video game exposition next week.
So far, Microsoft has the lead on Sony in the battle for high-end video game machines, but it shipped only 11.6 million 360s by the end of June, compared with a target of about 12 million.
The hardware issue has marred a string of successes for Xbox 360, which has built an early lead over the PlayStation 3 with Microsoft's strong lineup of games and popular online service.
Microsoft said it had investigated the sources of hardware failures indicated by three red flashing lights on the console and had identified "a number of factors" that can cause such failures.
The company said it would extend warranty coverage to three years to cover the problem and would reimburse customers who had previously paid for repairs related to the three-flashing-lights error message. It also said it has made improvements to the Xbox 360 console.
The charge will be in a range of $1.05 billion to $1.15 billion, before taxes, for the quarter ended June 30th, Microsoft said.
The company is also finding increasing competition for some parts of its business, such as Apple's incursion into television shows delivered over the Web, which is also a feature of the Xbox online service.