This will position the Xbox as an all-in-one entertainment hub for the living room, incorporating games, movies, TV, music and sports.
A key feature is the integration of Kinect, which adds voice search to the entertainment experience - with Windows Phones available to use as a controller.
A blog post from Marc Whitten, corporate vice president for Xbox LIVE, reads, "The update is another huge step toward realising our vision of bringing you all your entertainment, shared with the people you care about, in an easy way."
Microsoft has announced an impressive list of on-demand content providers and apps for the revamped Xbox LIVE platform, including LOVEFiLM, ESPN, Channel 4, BBC and YouTube, which join the pre-existing Sky Player.
Ten of the new partners will go live tomorrow and others will be added later this month and into early 2012.
The Kinect function and integration with Bing means users can easily search for content from available providers.
Microsoft says there are currently 57m Xbox 360 consoles in homes around the globe – more than 35m of those are connected to Xbox LIVE and clock up 2.1bn hours online per month.
We reported last week on YouTube's new homepage, which takes on traditional broadcasters with a focus on channels and could soon be integrated into a Google TV. However Microsoft has a headstart as it already has millions of users who use the device from their sofa on a daily basis.
By adding the ability to use apps, Microsoft has opened up the possibility for consumers to begin buying content and products through its LIVE platform. At the moment the apps are only for entertainment, but what would happen if Xbox went down the platform route? Will we start to see the emergence of gaming-commerce?
Microsoft reveals more of the thinking behind this move in the infographic below.
David Moth is a Reporter at Econsultancy. You can follow him on Twitter.
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