Is This How Microsoft Corporation (MSFT) Beats Netflix, Inc. (NFLX) and Apple Inc. (AAPL)?

Microsoft Corporation (NASDAQ:MSFT) may be seen as a tech laggard these days, but the world’s largest software company could very well lead the way in raising the bar on interactive television.

Yusuf Mehdi and Nancy Tellem — executives of Microsoft’s interactive entertainment and studio divisions — presented at AllThingsD’s D:Dive Into Media conference yesterday. They provided some color on the state of the tech giant’s entertainment business.

The Xbox has definitely evolved into a full-featured entertainment platform. Traditional video games have been slipping for years, but Microsoft Corporation (NASDAQ:MSFT)’s market-leading console has thrived as a hub for in-game engagement and entertainment.

The installed base now stands at 76 million consoles with 46 million Xbox Live subscribers. The average user now spends 87 hours a month on the box. We can’t call them gamers anymore. These are folks watching video, streaming music, and surfing the Web through their systems.

The next step is to take advantage of the sizable Xbox audience and the Kinect motion-based controller to make television more customizable.

Original gangster
Microsoft Corporation (NASDAQ:MSFT) will naturally be working with successful studios for content, but don’t underestimate the potential of proprietary content.

Tellem watches over a studio with 125 employees focusing on interactive content. Some of the examples singled out by GigaOM include live shows and children’s programming in which kids can interact with the characters on screen.

Let’s put this into perspective.

Netflix, Inc. (NASDAQ:NFLX) is making waves today as the exclusive home to Turbo: F.A.S.T., a cartoon series based on a movie that DreamWorks is putting out this summer. Amazon.com, Inc. (NASDAQ:AMZN) went public two weeks ago with plans to bankroll pilots for five original children’s shows.

That’s great, but is Microsoft Corporation (NASDAQ:MSFT) about to raise the stakes by making its own kid-friendly content more interactive? What if kids can select characters in a show and then break off into games or interactive realms with the chosen character? What if a live show lets viewers vote on what viral video clips will play next? What if a talent competition is decided on the spot by viewers?

Microsoft Corporation (NASDAQ:MSFT) is at the cusp of redefining television. Yes, Microsoft.

TV dinner
Netflix CEO Reed Hastings resigned from Microsoft’s board of directors four months ago.

There was plenty of speculation at the time. Microsoft and Netflix were thick as thieves during the early days of Netflix’s streaming revolution. Netflix went with a Microsoft Corporation (NASDAQ:MSFT) platform that precluded Macs at first. When it came to streaming through consoles, Microsoft’s Xbox got a year of exclusivity before PS3 and Wii owners got in on the fun.