There is a lesson in the smoking controllers that work with the Xbox 360. Microsoft (MSFT) "will send out replacement parts for its Xbox 360 Wireless Racing Wheel after 50 reports that the video-game controllers overheated and released smoke when plugged in, the software maker said Thursday", according to MSNBC.

Of course, this follows other problems with the game console that lead MSFT to take a charge for $1.1 billion in warranty extension costs last quarter.

The Xbox has never made Microsoft a dime. In the last fiscal year.  the MSFT entertainment and device division lost $1.9 billion on revenue of $6.1 billion. It is hard to imagine that the company can make up that $2 billion deficit.

Xbox sales are OK. They still trail the Nintendo Wii, but are ahead of the Sony (SNE) PS3.

Microsoft made a classic error getting into the console business. It hoped to diversify its revenue to drive growth away from its core software businesses. And, in the process, it moved into an area of industry where it has no expertise. Quality control for hardware is not at all like writing code.

Now, with two public humiliations about the quality of the Xbox behind it, perhaps Redmond will reconsider whether the company’s brain power means that it can be successful in almost any arena.

Nintendo might buy the Xbox business. But, no matter, it is not a unit that Microsoft can make work.

Douglas A. McIntyre

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