James at GigaOm has written a post today in which he predicts that Microsoft’s Xbox is doomed, mainly as a result of the Wii’s success and the various ‘red ring of death’ issues which have affected many of the consoles.

However, we reckon James is being a little hasty in his judgement, and is not seeing the bigger picture.

While the failure rate of Xbox consoles – as much as 33% by some estimates – is hardly a great advert for the Xbox, it hasn’t been enough to dent the console’s popularity beyond repair, and Microsoft has built up an enviable position, both in terms of market share and in securing an installed base of millions for future multmedia plays.

By announcing that the company will cover the costs of repairs to all faulty Xbox consoles, as well as extending the warranty to three years, Microsoft has managed to turn around a potential PR disaster into a bona fide PR win.

We think that relationships between brands and consumers can be strengthened when problems are straightened out like this. It will also alleviate the concerns of would-be Xbox customers.

Microsoft has such deep pockets that it can easily afford to absorb the estimated £1bn repair bill, as well as the losses associated with launching the console.

These losses would surely be anticipated for a relatively new product that has established significant market share in a short time. They said it couldn’t be done. MS priced the Xbox sensibly and has spent countless millions on advertising the console to achieve critical mass. It reminds us a little of the mobile phone operators (does anyone know how much they’ve lost since the disastrous spending on 3G licenses?)

At any rate, from a zero position a few years ago, Microsoft has amassed a huge slice of the gaming market, eclipsing the PS3 in the process. Sony must be kicking itself… but maybe it became too confident in the legions of Playstation fanboys (I was a true Sony man until very recently…). It also failed to implement an online strategy that made any kind of sense.

Back in January, Bill Gates said that the company had shipped over 10m Xbox consoles since its launch, while users of Xbox Live had downloaded more than 100m films, games and TV shows through the service. Read that again…

Yep… Xbox Live users can also watch movies and TV shows, and this is why Microsoft’s Xbox losses can be discounted – it hasn’t just launched one product, but two: a games device and a set-top box with on-demand downloads for movie fans.

In establishing the Xbox as an online-enabled set-top box, Microsoft is looking at multiple revenue streams and a stake in The Battle For The Living Room. Those online DVD rental companies had better watch out.

Once consumers ramp up the speed of their broadband connections there will be a lot more download action, and the fact is that people want to watch movies on the TV, not on their laptop, and Microsoft is far better placed than, for example, a Joost, to profit from this rising trend. And of course, it has an installed base of 10m, providing immediate reach for anything it does here on in.

Meanwhile, there’s no denying the success that Nintendo has enjoyed with the Wii, but that console is aimed principally at the children’s and family market (James: do you what Nintendo’s current loss position is on rolling out the Wii?), while the Xbox has taken the place of the PS2/PS3 for serious gamers.

We believe that the Xbox will dominate in the years to come, with Nintendo expanding the gaming market. What Sony does is anybody’s guess, but we’re starting to think that the tide has fully turned against the Playstation.

Further reading:

Xbox Live, Major Nelson, and the Twitter epiphany