The arrangement, revealed at the E3 Media & Business Summit in Los Angeles, will let Netflix subscribers stream 10,000 movies and TV shows to Xbox consoles for viewing on television sets, beginning this fall. Xbox had movies and shows available for download before, but only half as many.
"This generation of consoles will change the face of home entertainment more than any other generation before," said John Schappert, corporate vice president of Microsoft's interactive entertainment division.
As Microsoft vies for a stronger foothold in the living room, so is rival Sony Corp., which has tried to make its PlayStation 3 into a broader entertainment device by including Blu-ray high-definition DVD players in the consoles.
The deal with Microsoft also marks an important expansion for Netflix, whose 18-month-old streaming service — which supplements its DVD-by-mail program — has been available on computers instead of TVs, unless consumers had bought a small streaming device from a Netflix-backed startup called Roku Inc.
Microsoft already has sold more than 10 million Xbox 360 consoles in the United States. More than half of Xbox 360 owners pay $50 a year for a "gold" membership, which will be required for access to Netflix's "Watch Instantly" library. They also must subscribe to Netflix, which charges $9 per month for the least expensive plan that includes unlimited streaming.
In partnering with Microsoft, Netflix may be building the streaming service to prepare for the day when the convenience and widespread availability of video downloading kills its DVD-by-mail service.
Although Netflix Chief Executive Reed Hastings still believes DVDs will be around for years to come, he has already poured more than $40 million into developing the streaming service.
Until recently, Netflix's streaming service hadn't been a big hit with the company's 8.2 million subscribers, because there was no way to easily watch the movies on anything but a computer.
That began to change two months ago when Roku began selling a small set-top box that could stream to movies to any television set. Roku sold out its initial supply of the $100 player in just two weeks. The device is now back in stock.
Microsoft had been widely expected to embrace Netflix's streaming service, partly because the two companies seem like natural allies. They share a common rival in Apple Inc., which has battled Microsoft in the personal computer market for decades and last year emerged as threat to Netflix with a downloading service for renting movies and TV shows.
What's more, Hastings sits on Microsoft's board of directors, although he says that connection had nothing to do with the Xbox deal.
While the Xbox 360 will have exclusive rights among the video game consoles to the movie streaming service, Netflix is still looking for other ways to reach TV sets. The company already has announced that LG Electronics will include streaming capability on a Blu-ray DVD player that will debut this year. Hastings also has promised at least one more major consumer electronics company will unveil a set-top box for Netflix before 2009.
The popularity of the Roku device already has proven that Netflix subscribers want to be able to stream entertainment from the Internet to their TVs, Hastings said, though he acknowledged that "the quality of content" is still lacking. Netflix's DVD rental library is 10 times larger than the streaming service, which rarely offers the latest home-entertainment options from movie and TV studios.
Hastings hopes to add about 8,000 more titles to the streaming service during the next 18 months.
Netflix shares gained 60 cents, 2.2 percent, to finish Monday at $27.61. Microsoft stock fell 10 cents to close at $25.15.
