The new Xbox music service will offer free streaming of songs from a central catalogue to an Xbox 360 games console. The service will also be available on Microsoft PCs, tablets and mobile phones after the launch of Windows 8 at the end of the month.
Microsoft has been trying for a number of years to make the household living room an entertainment hub with its Xbox. More than 67 million consoles have been sold since 2005.
Xbox Music replaces Microsoft's digital media store Zune, which was launched in 2010 and struggled to compete with iTunes.
The latest version of Windows, which will have both a tablet operating system and Windows 7 working alongside it, is designed to fight off challenges from Apple's iPad and Google's Android tablets.
The new music service will be available on the forthcoming Surface tablet from October 26, while it will be available for mobile phones soon afterwards.
The Xbox Music service will also allow customers to access songs offline through a "Xbox Music Pass". The pass costs $9.99 (£6) but it will be free from advertising and users will be able to play any track from a subscription catalogue an unlimited number of times. The pass gives access to tens of thousands of music videos on the Xbox.
Microsoft has developed the "Xbox Music Store", where users can go to purchase individual songs and albums from the selection of more than 30 million in the store. Apple's iTunes library has around 26 million songs.
The company says cloud storage will be available in the next year and users will be able to add tracks which were bought through other services to their personal Xbox cloud catalogue.
