Update at bottom of the post.

Someone figured out how to generate Xbox Live codes that worked, posted instructions to a forum and the resultant deluge of freeloaders has cost Microsoft anywhere between 1 million and 3.5 million dollars!

$1 million dollars? Really?

While it may make for an attention grabbing headline, I think that most people are overlooking the fact that these are Xbox live points, and if there is one thing Microsoft is good at (perhaps to the point of overzealousness) is cracking down on people who may be trying to game the system.

Some users claim they were able to generate 10,000 or more Microsoft Points. “Well Dark I have to thankyou I made a bot just for this and now have 380160,” wrote one user. “Just Got 3k Micrsoft Points Thanks Brooo,” wrote another. Microsoft’s Points system is the virtual currency for Xbox LIVE Marketplace, Games for Windows, Windows Live Gallery and its Zune online stores. The virtual points allow users to exchange cash from credit cards for virtual points to be used against goods. 80 points are equal to $1.

Do we really think it will take Microsoft long to do a search for accounts that suddenly have had a butt load of credits added to the system? Or do a comparison search between the codes which were validated, compare them to the ones legitimately purchased online (via credit card) and the ones purchased via cards from stores?

It is my understanding that the ones from stores don’t work until they are activated. By activated, I mean scanned in at the register, which through some background voodoo magic reports the card as active so when you get home you can scratch off the back and enter the code to use it.

A couple of quick searches and they should be able to identify codes that weren’t bought with credit cards, in stores, dispensed through Bing Rewards etc.

I think, in a couple of weeks from now, we may be seeing a whole slew of Xbox live accounts being banned. Expect to see a deluge of freeloaders crying foul and calling Microsoft every name under the sun while protesting their innocence.

UPDATE: 1UP.com has an update from Microsoft on this via the Kotaku blog:

In a statement from Microsoft Kotaku was told that it has “taken steps to invalidate the codes obtained illegitimately,” so any formerly valid codes you might still have lying around will no longer work. If you’ve already used any on the Xbox Live or Zune Marketplaces, you face the risk of an unspecified punishment.

“We take safety and security very seriously and require that Xbox Live members use the service in compliance with applicable laws and specifically prohibit people from engaging in illegal activity as a part of our Terms of Use and Code of Conduct,” the statement read. “Our Policy and Enforcement team is evaluating whether or not certain individuals have violated the Terms of Use for Xbox Live and will take the appropriate enforcement on an individual basis.”

No timetable has been set for when the hammer will come down on these people, but we’ll be watching for the repercussions.

[Cross-posted at Winextra]