On the eve of an overhaul of the Xbox 360’s online service, Microsoft Corp. announced Tuesday one more entertainment offering in the United States: the ability to watch movies from Magnolia Pictures on the video game console.

The deal is small — Magnolia has distributed about 70 films — but it represents yet another move to beef up the online service, called Xbox Live, which Microsoft is counting on to broaden the console’s audience and differentiate it from rivals.

With Live, gamers can watch movies, download new games, chat with friends and play games with others. The service will be relaunched Wednesday, with a new user interface and a host of other features, including the ability to stream Netflix movies.

The introduction comes at a critical time for the Xbox 360, as sales have jumped in recent months because of a price cut, with the holiday season still ahead.

“I think it’s the most important week since we launched the platform, frankly,” said Marc Whitten, the general manager of Xbox Live.

By some counts, Microsoft already has succeeded — wildly — with the service.

	Microsoft Xbox Screen Shots
The old Live interface, heavy on text, had become outdated. An Xbox exec said it was designd for the 200 pieces of content in the Xbox’s marketplace in 2002, not the 15,000 that now exist.

Last week, at a conference in New York, Mindy Mount, the chief financial officer of Microsoft’s entertainment and devices division, referred to Live as a “little secret sauce to us,” crediting it with increasing the number of games each Xbox 360 owner buys because it makes it easy for users to try out new ones.

During a recent interview at his Redmond office, which is set up as a living room to replicate a gamer’s environment, Whitten rattled off a set of statistics to demonstrate Live’s popularity.

The majority of Xbox 360 owners also use Live, he said. As of last quarter, there were 22.5 million Xbox 360s on the market worldwide and 14 million regular Live users.

Overall, Xbox 360 owners — who have downloaded more than 500 million pieces of content through Live — also tend to use their console’s online offerings more than owners of Sony’s PlayStation 3 or Nintendo’s Wii.

So, for instance, in games that are not exclusive to the Xbox 360, such as Guitar Hero or Rockband, the majority of song downloads take place on the Xbox 360.

Microsoft has profited handsomely, reaping more than $1 billion in revenue through Live, partly through a $50 “Gold Level” annual fee needed to play games with others with the service.

Still, Whitten said, the Live interface — which is heavy on text — had become outdated.

He said it was designed for the 200 pieces of content originally in the Xbox’s marketplace at launch in 2002, not the 15,000 that currently exist.

So the new user interface allows users to shop for items looking through images, instead of just text.

There’s also a heavy emphasis on Live’s social networking features, which let users communicate with one another while logged in.

Each user will now be able to customize an avatar, down to its hairstyle and clothes. Logging in, a user can see various avatars representing his or her gamer friends. If they’re playing games, the avatar stands next to a title; if they’re not active, the avatars appear to be snoozing.

In addition to the deal with Magnolia in the U.S. (and a similar one with MGM and Paramount in Italy and Spain), Xboxers will also be able to stream more than 12,000 Netflix movies and TV episodes on their consoles if they are also Gold members and are Netflix members.

About 300 Netflix movies and TV episodes will be available in high definition.

Whitten said the new Xbox Live was designed for the “next 20 million, 30 million” Xbox 360 users.

Microsoft executives have said that because of the recent price cuts — which brought the price of the low-end Xbox 360 Arcade to $199 — they expect the majority of Xbox 360 sales are yet to come.

According to the NPD Group, sales of the Xbox 360 jumped 78 percent in the United States in September, surpassing sales of Sony’s PlayStation 3. Last month, sales were up an additional 7 percent.

At last week’s conference, Microsoft’s Mount said the company expected the total worldwide installed base of the Xbox 360 to reach 25 million by the end of the month, surpassing the popularity of the original Xbox.

“It’s a great milestone for us, but it’s only a start when you consider that history shows that more than three-quarters of a console’s sales come at a price of $199 or lower,” she said.

Microsoft’s primary competitor — the PlayStation 3 — is advancing its own online efforts.

Microsoft executives say the PlayStation 3 targets the same audience as the Xbox 360, while Nintendo’s Wii, which has lapped both consoles in sales, is bringing in new gamers to the industry.

Sony’s online offering — the PlayStation Network — boasts 14 million registered users, up 136 percent since January. There have been 273 million downloads.

Susan Panico, the senior director of the service, said that earlier this year, the company revamped its own store.

In July, the company also announced its own service to download and watch movies and TV shows through the PlayStation Network. She said content can then be transferred to a PlayStation Portable device so that users can take it with them, which she said was the service’s “biggest differentiator.”

She also said that with the PlayStation Network, users can play with others online for free.

“Online gaming is one of those tenets for a gamer that should be free,” she said.

The company also plans to start a social network — called PlayStation Home — later this year, with its own “highly realistic” avatar system.

Still, Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles, said that in online services, Microsoft had the lead, albeit with a head start, because it launched Live several years before Sony started the PlayStation Network.

He said for Microsoft, the goal with the new Live is twofold: to get Xbox 360 owners to use Live and to get Live users to talk up its features.

In that sense, he said, the Netflix tie-in might be most significant.

Pachter estimates 8 million Xbox 360 owners pay the $50 annual fee. Of those, roughly 10 percent are also Netflix members.

“You’re going to have 800,000 really satisfied customers immediately,” he said.