The internet arms race between Google and Microsoft took a new twist on Friday as the companies announced plans to spend more than $1bn between them on new data centres to handle future rapid growth in online traffic.

Google said it would spend $600m to build a new site to house a server farm in Lenoir, a small town in North Carolina, while Microsoft unveiled plans for a $550m facility in San Antonio, Texas.

Google’s breakneck growth has been underpinned by the rapid expansion of its underlying technology infrastructure, forcing rivals to ratchet up their own spending.

Google’s capital spending more than doubled, to over $800m, in 2005 and continued to soar last year, though full details will not be available until it reports earnings at the end of this month.

Microsoft, meanwhile, has been laying the groundwork for its new “Live” range of services, which represent its latest attempt to revitalise its online services business.

The San Antonio plant will be the second data centre created for the Live business, in the wake of a facility under construction in its home state of Washington, said Brooke Richardson, group product manager for Live services.

The battle to attract internet data centres has become the latest focus of competition between economic development officials in the US, with states competing with financial incentives to attract new facilities. Google chose North Carolina after receiving a package of incentives worth $100m.

Low electricity costs have also become a significant factor in deciding where to locate data centres, given the high power consumption of the ranks of servers they house. That has been one factor behind recent decisions by internet companies to build new facilities in the north-western US, where lower hydroelectric power costs make them cheaper to run.

North Carolina’s electricity costs rank broadly in the middle of other US states, meaning that it has to compete with aggressive tax breaks to attract data centres liks this, according to Diamond Management and Technology Consultants.

It added that Google’s choice of a small town 60 miles from Charlotte reflected the additional incentives being offered to big companies to locate their centres in rural areas.

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