Report: New Xbox 360 with smaller chips could cause inventory headache

Microsoft (MSFT) is poised to ship new Xbox 360 consoles featuring chips made with IBM’s (IBM) 65-nanometer process, reports Dean Takahashi of the San Jose Mercury News. The machines will not yet contain 65-nanometer graphics chips from ATI (AMD), he says, but they could still be more stable than the consoles on the market today, which have suffered from overheating problems.

Microsoft’s troubles with the current Xbox 360 design have given the company’s game division a black eye lately. Rampant engineering problems have caused some of the consoles to overheat and lock up; Microsoft has said it will take a charge of more than $1 billion to deal with repairs. The company also said today that some of its Xbox 360 Wireless Racing Wheel accessories have reported that the item can overheat and spew smoke when plugged into an electric socket.

Still, the Xbox 360s with the new 65-nanometer design, code-named Falcon, could pose some challenges for Microsoft, Takahashi says:

Arguably, the Falcon-based machines will be inherently more stable. Machines that use them will probably have fewer thermal issues. Those machines should be more reliable, logically speaking. But that is conjecture. I haven’t seen one of these Falcon-based machines and no one can say whether they are in fact more reliable.

So if you wait to buy an Xbox 360 that has the Falcon board in it, then logically you’re making a smart move. You’ll be buying a console that will last longer and have less risk of failure. …

But here’s the problem for Microsoft. They have a lot of inventory of the older 90-nanometer machines. … It has to sell these machines out before it starts selling the Falcon-based machines. That means that a lot of consumers are going to be buying machines that don’t have the highest quality.

Meanwhile, Sony’s (SNE) PlayStation 3 has had its own challenges; its high price (starting at $500) has kept many consumers

at bay, perhaps helping Nintendo’s Wii console to establish itself as the mass-market favorite.

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