I wish I could say I had inside knowledge about the veracity of this rumor, but sad to say, I do not. However, I desperately hope that this rumor is true, as it simply makes sense for Microsoft to do something like this.
According to this article on MSNBC, Microsoft may be set to announce a link-up with Netflix, one that would allow the full Netflix library to be streamed for instant viewing through an XBOX (or, at least the ones that Netflix has negotiated rights to stream over network connections, which has to be more than the paltry sum Microsoft has rights to stream through its XBOX Live service).
Timing-wise, it would make sense. HD DVD as a format is now, officially, dead. The manner of its collapse was certainly peculiar, and suprisingly quick. A decision by one studio (albeit a rather important one - Warner Brothers) has led to a domino effect wherein official support for HD DVD has all but disappeared in about a month (with Wal-Mart, once believed to be tilting towards HD DVD on account of its lower price, becoming the company to put the final nail in the HD DVD coffin) .
XBOX will likely offer a Blu-ray add-on player in the near future, something you can do when you haven't committed your console to one format or the other. As a longer term strategy, however, it would make most sense to do something serious about making digital downloads - the thing that executives up and down Microsoft have been saying will make HD discs of either format obsolete - a reality. XBOX Live's video download service was a nice start, but Microsoft MUST get more movies available through the service if it hopes to pose any kind of serious competition to video rentals.
A Netflix hookup would, hopefully, offer the necessary breadth, while giving Netflix a TV-attached platform through which to stream their content. Though Netflix has partnered with LG for its own Set-Top Box, I think that will be somewhat of an uphill battle. How many TV-attached devices are people willing to install in their homes? Would HBO be as popular if everyone had to have an HBO-specific STB atop their television, as was the case in the company's early days?
It's hard to get extra devices attached to a TV, and in that regard, game consoles have significant advantages (which likely explains Microsoft's willingness to undertake the expensive battle for game console dominance). Besides making an XBOX more attractive as a source of entertainment, Netflix would benefit as well, as it would give them an instant installed base.
Of course, there would have to be some work done to make a Netflix store through XBOX live viable, work that cuts to the core criticism I have of the XBOX strategy as a whole. If you ever used the XBOX Live video download service, you would have noted how horrible the user interface is. All videos are essentially stacked in a long list, which would be a nightmare if they ever did get more than the 400 movies (at last count) that were available for rental through the service.
Part of the problem is likely the rigid "blade" structure that is the user interface convention for the XBOX 360. Though it's perfectly fair to have a common navigation paradigm that makes the XBOX UI readily understandable to all users of an XBOX, why can't there be a bit more flexiblity with respect to blade CONTENT?
I spoke last week about Microsoft's core identity as maker of platforms and APIs, and that Microsoft should embrace that identity as surely as Apple embraces their designer gestalt because it constitutes something that Microsoft does very well. That should apply equally to Microsoft's efforts in game consoles.
Though XNA (Microsoft's API for user-created games) is nice - though a bit restricted in scope - I really wish Microsoft would start to treat the XBOX as their TV-attached platform upon which third parties could create more than just games. With all the development technologies floating around Microsoft - and particularly with the isolation capabilities of .NET (providing more control over what a .NET program would do within an XBOX) - that should be a far easier task than would be possible for any of Microsoft's game console competitors.
Clearly, some work needs to be done to the XBOX UI to make a Netflix store interesting to look at, much less usable. I sincerely hope that those efforts won't be a one-off attempt to shoehorn a new feature into the XBOX frame. Rather, it should serve as the start of something that will enable the XBOX console to be a true platform for TV-oriented services. Wouldn't it be interesting if I could write a custom Silverlight application (as a useful and sensible technology example) accessible from one of the XBOX blades that is dedicated to third-party content?
That approach is a specifically Microsoft strategy, and would play to Microsoft's strengths while distinguishing the XBOX even more from its competitors.