When the latest version of XBox Live is unveiled Sunday, the free update will serve as a reminder of both how far the Microsoft service has come and how much further it still has to go.

The online entertainment storefront for the XBox 360 gaming console has been offering TV and movies for five years, giving Microsoft a long head start into what has become one of the most competitive environments in media: so-called “over-the-top” devices delivering videos as a potential alternative to incumbents like cable and satellite.

XBox Live may be making its greatest strides yet between the addition of Microsoft’s Bing search service and upgrade of Kinect, the voice and gesture-control device that renders the console’s own controller irrelevant to entertainment consumption. Moreover, XBox Live is making a sixfold increase in blue-chip content partners that will include Comcast and interactive versions of channels the nation’s largest cable operator doesn’t have.

But the fact Microsoft has made a deal with Comcast to begin with is a telling indication that matching the offerings of MSOs isn’t easy. The U.S. portion of the 35 million XBox Live subs worldwide are watching over an hour of video per day in addition to the gaming they consume on the service for $60 per year. Regardless, the buzz on cord-cutting solutions tends to get dominated by entries from tech giants like Google TV and Apple TV or smaller specialized players like Roku and Boxee.

Yet XBox 360 and Sony’s Playstation 3 have proven that consoles ceased to be strictly for gaming years ago. A study issued last month by Strategy Analytics found that 65 percent of Xbox 360 owners under the age of 25 watch more movies and TV shows through the console than on computers.

More than a few of the strategies shaking up the multichannel landscape today got their start on XBox Live. Two years before TV Everywhere reared its head, it was offering authenticated cable access abroad to MSOs like France’s Canal Plus. XBox 360 was also the first device to provide an app capable of connecting TVs with Netflix, which remains the console’s most popular video attraction. XBox Live was the first service that enabled renting high-definition movies on the Internet.

“A million tech years ago, that was innovative,” said Ross Honey, GM of entertainment and advertising at XBox Live. “Today your toaster can do that.”

The biggest innovation to the new update is its range of navigation options. Kinect, a sensor that listens to voice commands, has been better integrated into XBox Live and tied to Bing. In addition, Windows wireless devices can run an app that turn the phone into a remote control.

All that functionality may be necessary given the sheer increase in content coming to XBox Live viewers will dig through. Many of the 48 programming partners coming in the U.S. and overseas were first announced in October, including HBO Go, BBC iPlayer, Bravo, Syfy, TMZ and “Today” show. New additions to that roster include MLB.tv and Vudu.

At first blush, the lineup seems a giant step toward realizing the speculation that Microsoft was looking to be a “virtual MSO,” packaging the same channels that cablers and satcasters provide. But none of the networks in the current XBox Live lineup are a replication of the live 24/7 channels offered by MSOs; they are either broadband products like HBO Go or meager VOD samplings such as what Bravo provides.

Two key ways Microsoft looks to close the quality gap with the MSOs this go-round is by offering subscribers to both Comcast and Verizon-owned FiOs TV authenticated access over XBox, which essentially turns the console into a set-top box.

But even in those instances, subs aren’t getting the full experience they get from their cable or telco providers. FiOs TV users can only watch a pre-selected bouquet of 26 channels that include HBO, MTV and CNN but not the complete lineup. And Comcast doesn’t offer access to its live channels at all, opting instead to provide access to its broadband VOD platform Xfinity.

The second key way Microsoft is striving to differentiate itself from MSOs is its gradual build-up of channels with special features. Last year, it launched the effort with an ESPN-branded channel that turned college football telecasts into interactive extravaganzas for viewers to interact socially and play games with friends using XBox. UFC will get a similar treatment with the new update, rolling up content from its pay-per-view events, UFC.com and exclusive material.

But even there MSOs stay a step ahead given the UFC offering won’t include all MMA league’s fights that will be featured on a range of News Corp.-owned linear channels including Fox and FX.

There are still other fronts where Microsoft can look to make advances in programming, but aren’t getting significant improvements in this update. The Zune marketplace, an iTunes-like storefront for ordering movies and TV shows a la carte, returns with little enhancement. And Microsoft hasn’t experimented with its own original programming for XBox in several years, though Honey indicated the company hasn’t ruled that out for the future. Previous efforts included an exclusive licensing of the webisode sensation “The Guild” and an interactive adaptation of the Endemol unscripted format “1 vs. 100.”

Looking back years from now on the over-the-top race, all the content growth coming to XBox Live with this update will likely be overshadowed by improvements made to Kinect. It may be the most crucial feature given the hype has already begun that Apple will introduce its own Internet-connected TV set next year complete with Siri, the voice-recognition feature currently wowing buyers of the iPhone 4S.