Microsoft has been approved for $20 million in tax credits by the Iowa Economic Development Authority Board in exchange for investing nearly $700 million to expand their data center in West Des Moines, Iowa. The data center — which has been dubbed “Project Mountain” — will support a range of Microsoft products, including the servers that will be used for Xbox Live and, presumably, the Xbox One‘s cloud computing services.
Microsoft’s Christian Belady said in a statement to the Des Moines Register: “The expansion supports the growing demand for Microsoft’s cloud services,” and it represents “our latest in efficient data center thinking.”
Documents filed with the state of Iowa show that Microsoft plans to invest $677.6 million into the expanded data center, bumping up their current West Des Moines employee count from 50 to at least 74.
Granted, the entire “Project Mountain” operation will not be solely devoted to supporting Xbox Live on the Xbox One, but the substantial investment seems to be setting Microsoft up for a huge financial mess if the next-gen console fails to be anything other than a smashing success.
With a total investment (discounting the tax break) of $657.6 million, this means that Microsoft will need to sell over 1.3 million Xbox One consoles at $500 a pop just to recover the revenue associated with the Xbox Live server expansion. Of course, that number is extremely low, since it does not even take into account the marketing, manufacturing, distribution, or R&D costs associated with the upcoming console.
While not a perfect example, this bit of next-gen spending highlights part of the problem with the video game console market. The spending on the manufacturing side has far out paced the amount of money the market is willing to pay for the hardware/software. Used games are not harming the video game console market, the out-of-control costs associated with making the products are the real culprit.
Microsoft (and many other companies operating within the traditional video game console market) are spending vast amounts of time and money making products with forced features that the majority of their customers do not want.
Consider this, according to Microsoft’s own data only 31% of Xbox 360 owners bought Kinect and about 39% of them are paying for Xbox Live subscriptions. Not even half of the current Xbox 360 customers use these features, yet Microsoft is pushing the Xbox One out the door with a required Kinect (which will sit unused by a large portion of those 69% who opted not to buy one the first time) and a $657 million Xbox Live server expansion (even though the console no longer requires an Internet connection).
Maybe it is just me, but forcing features into your products that the majority of customers have already proven they are not interested in, does not make for a sound business model.