You might have already read by now that Microsoft is at least considering integration of web services like Hulu and YouTube into Xbox Live. I see this as a big deal.
First, Hulu has a different business model than Netflix. Users can view content (TV and films) at no charge, the shows being paid for by advertisements. It includes a number of triple-A and top-notch TV shows (like NewsRadio), and browsing them is simpler than with Netflix. Hulu even has an integrated tool for selecting clips and emailing them to friends. I love Hulu. I much prefer its quick and easy TV-on-demand service with relatively few commercials in lieu of a traditional cable or satellite subscription.
The first complication I see is that Xbox Live currently charges users to rent content which can be viewed for free (through advertisements) on Hulu, such as Dr. Horrible's Sing-Along Blog. My gut says Microsoft would screw us and not allow Hulu to show anything we're charged for now, but it's possible Microsoft would take the high road and allow us the paid-by-ads alternative.
Microsoft would almost certainly place its own ads in Hulu's content. That strikes me as the absolute best marketing tool the company would have for reaching XBL users. I bet most users are more likely to watch a good TV show or movie with game advertisements in them than to download trailers and video interviews for every game they might enjoy. Ads in Hulu via the 360 would reach more Xbox users than ads anywhere else.
And contracting with Hulu would be a major selling point. Yes, it's available online, but most people would rather watch free, on-demand shows on their television than on their computer. TVs can be hooked up to PCs, but that's not a mainstream practice (it's common among tech junkies only, who are not that big a chunk of society as a whole).
Hulu would benefit greatly by attracting more advertisers with the 360 user community. Their services would consequently expand and become more attractive to users and marketers. More film studios who currently contract with TV broadcasters might see Hulu as a viable partner. Because Hulu would finally be playing on the televisions of millions, rather than on computers, the company could finally become a direct competitor to subscription television.
Of course, if Hulu was ever big enough to compete directly with them, the Hulu business model would probably change; either they'd gradually increase ad interruptions, as TV broadcasters have over the years, or they'd start charging a subscription of their own. But we can hope their present model would stand for a while.
Videos of Halo and other games already cover YouTube. More gamers would watch those sort of videos if it could be done while already focused on games (engaged on their gaming console). YouTube integration would greatly facilitate game tutorials and walkthroughs. It might even make gaming tournaments more viable.
YouTube integration could significantly affect the design of many games. Community and Arcade games would use YouTube most frequently, but I'm talking mainly about the design of triple-AAA titles. And I don't mean like Spore either, which enables players to share their creature creations. No, I'm talking about dynamics. What makes games like Halo and MMOs so popular on YouTube is their room for fresh, personal experiences. It's the ability to still see new and exciting stories months or even years after the game is released. It's the revelation of personal preferences and personal adventures -- stories which are individually representative.
YouTube play-session stories are excellent marketing. Ads are more effective when they're recommended by friends. Videos of unique and exciting experiences encourage lengthy conversations between friends -- conversations which embed the ads to memory, inform, and stoke anticipation. YouTube integration could greatly increase impulse purchases of downloadable content.
Anyway, long story short, I hope Microsoft can work out satisfactory contracts with both YouTube and Hulu. Those deals could be as sweet for gamers as for Microsoft and advertisers.