The Xbox Live Arcade game Geometry Wars, for example, constructs its high score table using your own best score and those from the players in your Friends list.
The Friends list also encourages social networking, enabling Friends to send text and voice messages to each other and to connect with new players they encounter in any online games they play.
With an Xbox Live headset you can set up private VoIP conversations with Friends as you watch a DVD and chat to opponents as you play Project Gotham. The technology is seamless, almost effortless.
If the social aspect of Xbox Live is turning heads, then the Xbox Live Marketplace has the potential to be groundbreaking. Right now, you can buy extra Arcade games here, download demos and movie trailers, purchase themes and pictures to customise your Xbox's OS.
In the future, the Marketplace could host pay-per-view movie stores, Napster-style music services and rival iTunes for downloadable TV episodes.
"Since the launch of Xbox 360," says a post on Microsoft's Gamerscoreblog, "Xbox Live members have downloaded over 4 million pieces of high definition games, music and movie content from Xbox Live Marketplace."
And this is just the start. Broadband connectivity ultimately opens up the Xbox 360 to the vast range of services that the Internet can supply.
Video chat via an Xbox 360 web camera is already in the works, as is an external HD DVD drive and the integration of MSN Messenger with its Xbox Live counterpart.
But imagine the addition of RSS-style sports scores, Internet radio, web browsing and one-click web shopping. With the addition of a USB TV tuner, couldn't the Xbox 360 act as a standalone PVR?
As the recent Xbox 360 dashboard update proves, Microsoft's console can be improved and its functionality buffed up as required.
Room for improvement
Let's not get carried away, though. First and foremost, the Xbox 360 is a games machine - the advanced digital home extras not only require PC connectivity but some basic IT know-how to network everything together.
There's a pretty big market in games and a lot of money to be made there. That doesn't mean that consoles won't evolve."
Consider this: the Xbox 360 is a triple-core machine with a custom-built ATI graphics processor and a DVD drive. It's broadband-ready, high-def capable and supports VoIP with the addition of a cheap headset. And you can buy it for just over £200. In comparison, ATI's latest PC graphics card costs over £400 on its own.
Like most Microsoft products, we've yet to see the best of the Xbox 360. How will Microsoft develop the home entertainment angle? When will a larger hard drive be released to accommodate video downloads? Is there, as some web-speculators hope, an Xbox portable planned to combat Sony's PS3/PSP combo?
The Xbox, and Microsoft's home-and-entertainment division, is in a marathon, not a sprint," observes Seth Jayson at the Motley Fool.
"Microsoft is building toward a future where recurring revenues from small gaming and entertainment purchases, along with license fees, Internet advertising, and revenue streams yet unimagined, will congregate in Microsoft-developed living-room products."
Xbox 360 vs. PlayStation 3
The Xbox 360 and the PS3 seem destined to meet each other head-on in the battle for the digital home. The web is buzzing with rumours about Sony's strategy - the PS3 will act as a standalone PVR; the PSP will be able to stream video from the PS3 anywhere in the world; the PS3 will link up with Sony's Connect store for music and movie downloads.
The PS3 will also include a high-definition Blu-ray drive as standard, while Microsoft is backing the rival HD DVD format. The PS3 will undoubtedly give Blu-ray the shot-in-the-arm it needs to become the dominant next-gen optical format. The Xbox 360, as we've already pointed out, only has a yesterday's-gen DVD drive.
Despite announcing an external HD DVD drive add-on for the Xbox 360 at CES this year, Microsoft doesn't appear worried about the HD DVD/Blu-ray contest. Perhaps broadband makes it irrelevant.
"A drawn-out high-definition optical-disk format battle helps Microsoft buy time to promote its connected-home strategy," writes Junko Yoshida in the Electronic Engineering Times.
"By undercutting the value of standalone pre-recorded media devices, Microsoft hopes to accelerate a consumer electronics transition into the brave new world of 'downloadable' content."
Whatever the future holds for the two consoles, Sony and Microsoft are finally making the big push for living room dominance. It's the push we've been waiting for, the push that we'd hoped companies like Panasonic, Toshiba, Philips et al would have made last year.
And by making this push, Microsoft and Sony will introduce the mass market to the ideas of digital downloads, VoIP calls and streaming video.
Whatever Sony has up its sleeves, Microsoft will counter and vice-versa. This tit-for-tat tech-conflict will be the best thing that has ever happened to the digital home.
Ultimately, it doesn't matter who wins this battle for the living room. If we want the digital home idea to gain momentum, it's the battle itself that's important.