• by Steve Smith , Staff Writer @popeyesm, January 2, 2009

Microsoft never made a secret of its ambitions to turn the Xbox 360 game console into a connected media server, but the latest upgrades and partnerships squarely target set-top box and VOD markets. The "New Xbox Experience" (NXE), released in mid-November, is the most significant upgrade to the console's dashboard and infrastructure since its launch two years ago.

Gamers now have highly customizable avatars, more robust social spaces, and user-generated game designs, which democratizes console gaming in new ways. But the big gun on Microsoft's next level may be the arrival of mail-order DVD kingpin NetFlix, which finally gets a digital delivery link into the living room. NetFlix subscribers can attach and manage their queues within the NXE and even stream TV episodes and full-length films from the service's instant-access library of 12,000 titles. The partnership gives NetFlix new marketing opportunities, such as a 48-hour free trial coupon packed with select Xbox games.

Elsewhere in NXE, Microsoft is expanding its own Video Marketplace service to compete directly against the Apple TV model, now offering film rentals in standard resolution and hi-def. With an installed base of more than 11 million, Xbox 360 suddenly becomes a digital distribution platform to be reckoned with and NetFlix gets an important leg up on perennial laggard Blockbuster. As recently as August, Blockbuster CEO Jim Keyes told PaidContent, "Is there any real urgency for us to go out there and create a whiz-bang set-top box? No. Are we interested long-term in being in that space? Sure." Keyes changed his tune in November when he revealed to analysts that Blockbuster will release a set-top box this winter that ties into the MovieLink digital distribution service he bought last year. Apparently, "short term" is the new "long term."