The firm will extend the device's warranty coverage from 1 to 3 years to compensate consumers, but doesn't plan to instate a recall or exchange programme.
The design issues surfaced recently, Microsoft's gaming chief Robbie Bach said in a conference call with financial analysts.
"In the last couple of months we started to see significant increases in repair requests and call requests and significant attention from people," Bach said.
The company didn't disclose the exact nature of the problems, but said that it had made the necessary design changes and units that are currently in stock will be upgraded.
The extended warranty period is limited to hardware failures that are indicated by three flashing red lights on the console. Consoles suffering from such problems are entitled to free repairs and shipping.
Microsoft estimates that the repairs will cost the company US$1.05bn to US$1.15bn. The cost are spilt evenly between the higher than expected return rates for existing consoles under the 1-year warranty, and future returns under the extended warranty period.
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iTnews Executive Retreat - Security Leaders Edition
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