Microsoft has ranged from mum to cagey on the exact source of the hardware issue that has red ringed thousands upon thousands of Xbox 360s, with Robbie Bach chalking it up to a "a Microsoft design issue." While the President of the company's Entertainment & Devices Division would prefer to leave it at that, a report from the EETimes lays blame on the console's graphics chip, one made on the cheap.
The online outlet cites Gartner research analyst Bryan Lewis who, at the Design Automation Conference, said that MS "wanted to avoid an ASIC vendor," opting to use a general purpose chip designed in-house. ASIC means application-specific integrated circuit, according to my sources that are Wikipedia. The EETimes writes that the decision saved money up front, but ultimately cost the company over $1 billion in warranty related costs.