Concerned about the bad image the “red ring of death” creates to the Xbox brand and probably alarmed by PS3’s alleged 1% failure rate, Microsoft decided to extend the warranty period for its next-gen gaming console to 3 years.

“Any Xbox 360 customer who experiences a general hardware failure indicated by three flashing red lights will now be covered by a three year warranty from date of purchase. All other existing Xbox 360 warranty policies remain in place.”, Microsoft said in a statement.

Microsoft’s concern reached critical levels this week when reports began emerging on the Web that Xbox 360’s failure rate is situated between 30 and 33%, with FOX News (10pm TV News Report) stating that an estimated 2.5 million consoles have proven defective until now.

Microsoft considers these numbers as “unacceptable” and “is enhancing its Xbox 360 warranty policy for existing and new customers.” The Redmond giant apparently identified the source of the hardware failures that cause the infamous “red circle” after “extensive investigations”.

Microsoft will take a $1.05 billion to $1.15 billion pre-tax charge to earnings for the quarter ended June 30, 2007 for anticipated costs under its current and enhanced Xbox 360 policies.

"The majority of Xbox 360 owners is having a great experience with their console and has from day one. But, this problem has caused frustration for some of our customers and for that, we sincerely apologize," said Robbie Bach, president of Microsoft's Entertainment & Devices Division. "We value our community tremendously and look at this as an investment in our customer base. We look forward to great things to come."

The company had also said it would sell 12 million of the consoles by June 30. Instead, it has shipped a total of 11.6 million units, Chief Financial Officer Chris Liddell said on a conference call.

"That is slightly shy" of its projections, Liddell said, but added "we're happy with that number."

VG Chartz however reports that Microsoft's console sold only 10.3 million units as of this day.