Analysis/ Context of Microsoft’s Billion Dollar Problem Affecting Stakeholders
The scope of Microsoft’s Billion-dollar problem: ‘Xbox 360’s Red Ring of death’ coined by the early social media age of the mid 2000’s is difficult to discern, because it is so unique in nature. Its place and time in history; with major money by a major known company (Microsoft) in a niche market (Video Games). Taking place primarily in 2007, just after YouTube began and just before Facebook and Twitter created the social media boom, this crisis benefitted from diminished newsprint influence with muted mainstream coverage that would be looked at by today’s standards as a Public Relations success in comparison to chief competitive rival Sony’s disastrous PlayStation Network Outage in 2011. Larger, the crises carried long-term consequences over a decade from 2005-2016 affecting the brand’s trust among consumers and market leadership in the next generation cycle. Though this paper addresses both, for the purpose of narrowing scope the short-term of six months will the investigative focus of this crisis, leading to the restoration of the physical state of the 360 console.
In its development phase, the company rushed production on its entertainment platform. The organization themselves, a known software company with notoriously limited success in creating hardware, teamed up with Taiwan Semiconductor Manufacturing Company and designed its own hardware specifications in order cut costs and time effectively, creating a portion of its own hardware and gain a one-year market advantage against its chief competitor the Sony’s PlayStation 3. Their actions affected their roughly 12 million install base at the time by creating an unreliable product that was less than industry standard. Luckily with a firm timely resolution that assuaged immediate concerns of that gamers were paying an unfair price, Microsoft’s move to extend the warranty to three years and guarantee free-shipping won over hearts and loyalty of its fans to at no one time overwhelming backlash. On the long-term side of brand maintenance, the company would continue on to sell 83 million-plus consoles beating its rival the ‘PS3’ for the entire seventh generation hardware cycle. On April 20th, 2016 Microsoft formally announced the discontinuation of the production of the console.0 Today, it is estimated that the 360’s successor the Xbox One has about half the market share of the PS3’s successor the PS4. Its arguable this was in fact part due to a lack of brand trust carried over from the last cycle.
Avoiding a career ending opportunity, and thanks to skillful managing of the company’s message, no job casualties were publicly known. Peter Moore, the head of the Xbox division resigned to work at game publisher Electronic Arts. Microsoft themselves never gave concrete numbers on the matter. An estimated 23.7% of its consoles at the height of the time1 in Xbox 360’s 11.6 million install base, were a part of the mass hardware failure costing the company 1.15 billion dollars in damage.2 One of their chief decisions was replacing the solder to lead-free complying with European standards, which unbeknownst to them would by chance overheat and dry out the GPU.3 As a short-term solution to blunt the impact and quell internet fan cries on either side of the console war, a warranty extension was announced. With the calculated 1.15-billion-dollar immediate write off, Microsoft’s stock price did not take a hit, it was hardly covered by anyone the mainstream media outside the games industry and was transcended to Microsoft’s quarterly report woes at a time of overall company profit downturn. A controlled implosion, backed by the dangerous luck of the time nobody aside from Microsoft, the internet, and its niche consumers took this seriously, and it will perhaps remain a fabled lesson for PR schools of thought. A well-handled crisis, with a qualified response that prevented the death of a brand and an unmitigated disaster.
The trigger event for this case is a BBC watchdog report that suggested Microsoft’s Xbox consumer failure rate was well below industry standard and that they were charging unfair rates for repairs.4 This came about at the time a single year warranty on the electronic device’s purchase was in place and the majority of customers who had now had the console were beginning to get either worried or frustrated with the support system. Microsoft responded in an official statement to the story situation minimizing the reports claiming there was ‘no systemic issue’, and it was all part of the industry standard. For the next five months the issue slowly continued to gain steam.
What differentiates this case from a typical tech industry crisis is that despite the months long gap in response, the company was still quick enough to beat the news industry to the punch. The open letter penned by vice president Peter Moore on July 5th, 2007 posted on the Xbox website represents the peak of the crisis only because it is the closest acknowledgement of the hardware failure by Microsoft and broke outside the industry as a simple product recall. Extending all warranties with free shipping killing any immediate concerns their customers had was a major financial price paid at the exact right time. Company Vice President Peter Moore quietly stepped down weeks later and the face of problem was with Microsoft no longer, perhaps minimizing the story potential.5 Due to the unpredictability of individual console performances, not all Xboxes failed at the exact same time, and some continue to work to this day. By the time the mainstream media outside the industry like CBC reported on the event again after a journalist had their console ‘brick’ out and fail was way late the winter of the following year 2008.6 The quality of games content and quantity of production with massive hit exclusive titles like ‘BioShock’, ‘Halo 3’, and Mass Effect kept gamers busy the fall following the announcement. Xbox failures eventually became casual and mundane.
Microsoft had given their response, paid a big price and their customers were taken care of and ‘back in the game’. Three years removed in a hardware refresh at E3 Microsoft changed the cosmetic look of its Xbox 360 replacing the now notorious ring and rewarded its audience, the industry press a new free console, and a face to forget about.
- Microsoft Corporation (central figure)
- Sony Corporation (rival benefactor)
- British Government Watchdog program (spotters)
- Game Developers and Publishers (second party affected by Microsoft’s business)
- Retailers: GameStop (primary games retailer in North America, the 360’s most popular market), Wal-Mart, and Best Buy
- FedEx (shipping company received a big payout for first class delivery from consumers to Microsoft), Purolator & UPS
- ATI (industry leading computer hardware chip manufacturer used in architecture of Xbox 360 successor)
- Taiwanese Semiconductor Manufacturing (used in manufacturing of the Xbox 360 in collaboration with Microsoft)
Because the timeline of the crisis is so broad audience segmentation is difficult to determine. Audiences may have felt burned by Microsoft early on individually by themselves, but they felt reconnected following the open letter, media pickup on the issue came much later, and by the time the warranties were over perception relapsed.
It was the ethical responsibility of the engineers in the Xbox division at Microsoft to monitor product testing under careful consideration. Morally it would have been best not to play fast and loose with the manufacturing of console parts, and saving money by trying to develop your own hardware when you are a software company.
Microsoft gathered its resources in an effort to determine what the problem was, they scoured online sources to see what consumers were doing and how they were initially reacting to it. On YouTube there were homemade videos of people wrapping their Xboxes in towels which led them on the right track.7 In the meantime Xbox denied any widespread systemic issue until they had sufficient evidence and discourse to respond to it. They then open and shut the case on it in one fell swoop essentially knocking out all of its strategic discourse in a single masterful letter.
They start by giving partial acceptance saying they hear their customers loud and clear “You’ve spoken, and we’ve heard you. Good service and a good customer experience are areas of the business that we care deeply about. And frankly, we’ve not been doing a good enough job.” “If we have let any of you down in the experience you have had with your Xbox 360, we sincerely apologize. We are taking responsibility”. But they do not get full marks for acceptance because they don’t admit to having a widespread hardware problem as an issue. Instead it is mitigated and minimized as a communications problem. A simple message that needs to change.
There is denial here in the form of structure and conjecture as they do not admit their own hardware is the problem, but elsewhere in the company and the use of customer service as a line and general business area leaves conjecture for the burden of fault to be placed on the structural interaction with second parties or highly negligible customers. It is nonetheless communicated otherwise as Microsoft being the ‘bigger man’ taking responsibility for what they frame as a two-way communications apparatus.
In the way of ‘Evasion of responsibility’ after a period of silence they initially mitigated small claims of defectibility in the watchdog response claiming it is industry standard.
The open letter addressed to Xbox gamers is an act of pre-neutralization before the hardware error problem reached critical mass in the media. They maintain good faith using phrases like ‘keep you in the game’, ‘appreciate your continued patience’ and ‘I want to thank you, on behalf of all us at Microsoft, for your loyalty.’ And with the warranty extension, the payment to replace their product line and refund any customers with the belief the majority of customers would stay put, they drew on their fan loyalty. This backs up their decision to compensate consumers, though it is arguably undone later if you factor in their underperforming sales of the 360 follow-up.
In terms of Differentiation they segment the audience of the open letter into addressing two separate things and then speaking simultaneously to two different groups: ‘To our Xbox Community:’ addressing both the aggrieved consumer, and the perceived ‘other’. First opening by speaking about customer service, then broaching the hardware failure. They isolate their grieved customers, and the vocal minority from a silent majority and non-aggrieved by saying “The majority of customers who own Xbox 360 consoles have had a terrific experience from their first day, and continue to, day in and day out. But when anyone questions the reliability of our product, or our commitment to our customers, it’s something I take very seriously.” In the latter part of the statement, they evade responsibility, appearing even to be provoked by critics in the mildest possible way. If these claims of gamers in crisis were unfounded however, and the ISO wouldn’t find the product below standards it would be unlikely the company would take such measures in resolution and compensation.
As for Corrective Measures, Microsoft doesn’t quite offer the prevention of reoccurrence Instead they vowed to restore order to the state of purchase offering reimbursements of retroactive refunds. Long term they developed a newer model which years later would erase the most grieving and noticeable hardware problems.
All of these strategies were appropriate for the time. In the social media age it would be a PR disaster. At least according to Moore himself, and evidenced by the Sony PlayStation software hack 4 years later in 2011 that would knock out online play services. This brand could have been synonymous with crisis, but they spotted it and steered it away from the consumers and out of the media’s way. This was something that given the circumstances, the stage of social media, pickup of mainstream media, randomness and lack of specific time of console failure, distance from console launch and precaution of existing warranties, there was quite a bit of luck at play. It in all likelihood could not have been handled better.
Did Microsoft do the right thing? If the right thing is considered taking full responsibility and acceptance for a general hardware failure caused by cutting corners to the market, the answer is an affirm ‘no’. The moral if not profitable action of prevention would have been to guarantee a more stable product by administering further product testing and to not sell their consumers in place of a larger timed market advantage when usual stages of research and development are foregone. Without fully acknowledging the results that its thinking behaviour had caused, Microsoft was able to take advantage of the lack of knowledge surrounding its crisis without providing raw numbers. This despite there being big money paid by consumers, visible photo and video evidence to back up consumer claims. Microsoft took the action its consumers wanted, and in the bottom line of business and games, the restoration of product was all anyone cared about. Microsoft took full clear measure of its actions without apologizing for its initial silence and inactive processional response. If this had been a few years later and social media had been better organized this would have for sure caused much more of a flare up among consumers and public relations. Because there’s often no crime in being capitalistic, moral lines were hard to pin on any one particular issue. In short, apart from casual corporate cynicism not really any serious ethical boundaries were crossed. As the results of this crisis continue to microscopically effect the company, Microsoft is clearing out its final inventory having sold 83 million units and along with it, hopefully the memories of the fated ‘Red Ring of Death’ remain just as imperceptible.
- Spencer, P. (2016, April 20). Achievement Unlocked: 10 Years – Thank You, Xbox 360. In Xbox Wire. Retrieved April 26, 2016, from http://news.xbox.com/2016/04/20/xbox-360-celebrating-10-years/
- Sands, A., & Tseng, V. (2009, August 28). Game console failure rates. Project Management Journal, 39(4). Retrieved from Google Scholar. http://www.demonish.com/cracker/1431551019_a91f4174d8/squaretrade_xbox360_ps3_wii_reliability_0809.pdf
- The Associated Press. (2007, July 6). Xbox 360 repairs to cost Microsoft $1B. In CBC. Retrieved April 26, 2016, from http://www.cbc.ca/news/technology/xbox-360-repairs-to-cost-microsoft-1b-1.636509
- McCaffrey, R. (Narrator). (2015). Podcast Unlocked 201: [Online video]. San Francisco: IGN. Retrieved from http://ca.ign.com/articles/2015/07/02/podcast-unlocked-201-xbox-bosses-past-and-present-share-stories-secrets
- *Note for the mp3 file attached to this project for “Podcast Unlocked: Episode 201 -Xbox Past Present and Future” skip to 51:02 in the timeline to hear the former head of Xbox Peter Moore speak firsthand about the ‘Red Ring of death’ until 56:55.
- Gibson, E. (2007, February 14). Microsoft responds to Watchdog. In Games Industry.biz. Retrieved April 25, 2016, from http://www.gamesindustry.biz/articles/microsoft-responds-to-watchdog
- Clow, K. E., & Baack, D. (Eds.). (2011). Cases in Marketing Management (First ed., pp. 498-505). N.p.: Sage Publications. Retrieved from https://books.google.ca/books?id=fI74N3u4USwC&pg=PA541&lpg=PA541&dq=peter+moore+xbox+open+letter&source=bl&ots=aQxAbIZpel&sig=Y0k4VFDysYwI1vvZ8RZJs_VXKOg&hl=en&sa=X&ved=0ahUKEwjg_fSUi6zMAhWkmIMKHTd3AC (Original work published 2007)
- Nowak, P. (2008, December 8). The red scare. In CBC. Retrieved from http://www.cbc.ca/news/arts/the-red-scare-1.735001
- Wheeler, K. (Narrator). (2007). The Towel Trick [Online video]. YouTube. Retrieved April 26, 2016, from https://www.youtube.com/watch?v=31tvXu34T8Q