In an attempt to become the de facto music service, Microsoft also plans to make the app the default music service in its Windows 8 operating system, immediately giving it a potentially massive user base when Windows 8 goes on sale on October 26.
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The service will combine the best parts of Spotify and iTunes. Microsoft will offer ad-supported streaming of its 30 million track library for free, with an ad-free option for $US9.99 a month (£8.99, AUD$11.99).
There will also be the option to download tracks and albums like iTunes. While there will be unlimited free streaming for the first six months, the number of hours will be restricted on the free option after the initial period.
Once you start paying the monthly fee, you also get offline listening, as well as access to 8 million music videos via the Xbox 360.
Next year, Microsoft plans on introducing a "Scan and Match" feature to compete with Apple's iTunes Match, uploading music from users' libraries to the Xbox Music cloud service.
Mobile music on the cards
While initially only available on Xbox 360 and Windows 8 devices, Microsoft has announced that it will also offer Xbox Music on Windows Phone 8 devices in the near future, as well as iOS and Android devices.
Windows Phone 7 users will however miss out, instead remaining on the Zune music service that Xbox Music replaces.
The fact that Microsoft is branching out of its own products indicates that it has learned a lot from its earlier attempts at music services.
Whether its enough to steal customers away from either Apple's iTunes or streaming services like Spotify, RDIO or MOG is yet to be seen, although having a free music subscription service with every new Windows 8 device sold is surely going to help the service take off.