In his pre-CES keynote speech, Microsoft overlord Bill Gates  (along with Robbie Bach and others) discussed the ways the company plans to innovate with both Windows Vista and Xbox 360.  Chief amongst these announcements (for gamers anyway) was the announcement that IPTV on Xbox 360 is finally a reality.

The official name of the service is IPTV on Xbox 360, and it will bring digital video recording to the box in a big way.  TV programs can be downloaded in the background, meaning gamers can continue to play, chat, and do the other things they do on the box while the service runs.  The service will be available by holiday season 2007, and will be based on the Microsoft TV IPTV Edition platform.

"Our goal is to make entertainment more personal, more interactive and
more social," Bach said. "IPTV on Xbox 360 and Xbox Live are powerful examples of ways we are bringing together the worlds of gaming, TV viewing and community to make it easy for people to access and discover their favorite content and share their personal experiences with the communities they are part of."

"As the magic of software makes it easier for people to be creators, publishers and consumers of digital content, it is expanding the way we think about community and entertainment," Gates said. "From your living room to your car, we're delivering a wave of new software products and services that make it easier for you to manage your day-to-day lives, express your ideas and share your interests."

Unfortunately, there are still more questions than answers regarding the new IPTV service. Chief among them is the issue of hard drive space.  Simply put, a 20GB hard drive is not going to be sufficient for any Xbox 360 gamer taking full advantage of Microsoft's offerings by running IPTV, downloading demos, saving games, renting movies online, etc.  That makes a bigger hard drive inevitable, but of course then the issue becomes how to get that into the hands of the gamers that already own one of the 10.4 million systems shipped to retail (as announced by Microsoft at CES) with hard drives attached.  The other issue is pricing for the service, which may go hand-in-hand with a bigger hard drive if Microsoft offers free (or cheap) upgrades to users signing up for the service.

You can see first video of IPTV on Xbox 360 in action here.  You can also watch the full Microsoft keynote address here.