The service will be expanded to Windows software-based computers and tablets, including the upcoming Surface tablet, from October 26, when Microsoft launches Windows 8. It will be expanded to phones shortly after that.
The world's largest software maker has been trying for years to make the household living room an entertainment hub with its Xbox. More than 67 million units have been sold since 2005.
About 18 months ago, the company realized that Xbox users were spending half to 60 percent of their time on entertainment services rather than video gaming, Xbox Music general manager Jerry Johnson said.
The market-leading video game console already streams Netflix, ESPN and other channels and is bolstering its service with music and other video content.
"We also realize, as an entertainment company, that music is an important ingredient on its own and as a part of different user experiences," Johnson said.
Xbox Music replaces Microsoft's digital media brand Zune that struggled to compete with iTunes.
Microsoft will offer a free ad-supported music streaming service, and a premium $9.99 subscription service for unlimited, ad-free streaming.
The service includes a download-to-own music store with over 30 million songs in its global catalog, more than iTunes' library of over 26 million songs. It also carries over 70,000 music videos, available only on the Xbox console.
It has cloud-storage features similar to iTunes and Amazon Cloud Player and an artist-based radio function like music streaming services Pandora and Spotify.
Xbox Music will be available in 22 countries. Microsoft hopes to take the service to Apple iOS and Google Inc Android devices next year.
Copyright Thomson Reuters 2012