Today, during the Xbox keynote at E3 Microsoft announced that "Zune video on Xbox LIVE will feature instant on, smooth streaming content in 1080p HD with 5.1 surround sound. This technology was developed within the Zune team and provides a great experience for accessing on demand video."

More details are available on Xbox.com:

Continuing a pioneering effort that began with the introduction of the industry's first video marketplace in November 2006 and broke new ground with the announcement of the first live TV straight from a gaming console last week in the U.K., Xbox today announced it would deliver yet another first-to-the-world: instant on 1080p streaming HD movies and TV with 5.1 surround sound—direct to TVs worldwide through its Xbox LIVE social entertainment network.

Instantly stream blockbusters like The Dark Knight in 1080p.
Instantly stream blockbusters like The Dark Knight in 1080p.

Starting this fall, a broad selection of movies and TV shows from Zune video on Xbox 360 will be available to start and stream instantly, in the highest video quality at the push of a button. No discs, no downloads, no waiting. Get the selection of a video megastore, the best video clarity available and the convenience of cable, only on Xbox 360.

Additional Markets
Additionally, Microsoft announced it will more than double the number of markets where Xbox LIVE offers its TV shows and movies, growing from eight to 18, by adding Austria, Netherlands, Sweden, Norway, Finland, Denmark, Australia, New Zealand, Switzerland, and Belgium. Xbox LIVE members in every market will have access to instant on 1080p streaming HD video.

Additional details of Zune video on Xbox LIVE:

  • Video startup is as close to instantaneous as possible by seamlessly transitioning between many different bitrates and resolutions of video
    • Video playback will start at a low bit rate for fast download time and then ramp up to a higher bitrate and quality
    • This process enables delivery of up to 1080p with 5.1 surround sound
  • Xbox LIVE party mode let you watch movies with your friends even when you’re sitting in different locations
  • Enhanced search functions within Zune video on Xbox LIVE let you find your favorite film at the touch of a button