Foxtel and Microsoft joined forces this morning to announce a fascinating new partnership: from later in the year, Foxtel will be available via XBox Live, offering a full-scale IPTV offering for the first time.

XBox Live is the online gaming system presently primarily used for multiplayer games and the sale of licensed software.  There are nearly a million XBox 360 units in Australian homes.

The partnership means subscribers will be able to access Foxtel right across Australia (it is presently not available in many regional areas) without a Foxtel set-top box.  It comes two days after Sony began offering a movie-on-demand service for its Playstation 3 network.

The big questions over the proposal relate to pricing, not merely for the Foxtel by XBox Live subscription, but for users’ internet capacity.  An IPTV service, even one only used for pay-to-play events or movies, will require a bigger download capacity than most users presently receive from their ISPs, potentially limiting the service’s appeal.  The lack of a true high-speed network will also cramp the appeal of the service, at least until a national broadband network is up and running.

It’s also not clear whether Foxtel will price its subscription in the same way as its current STB-based subscription, or whether it will adjust the pricing to pick up more casual users who want to treat subscription television as an a la carte service (the constant complaint from subscription television subscribers is that they can’t tailor their channel and program selections but buy pre-set packages).

Foxtel will clearly be wary of cannibalising its own customer base by offering a different pricing package via IPTV, but may figure it can grow its customer base by tapping users who might otherwise not be interested in a full subscription service.  Given the limited costs of providing the XBox-based service (versus providing STBs), Foxtel may support a more flexible pricing structure for XBox subscribers.

Foxtel has relied heavily on half-owner Telstra’s HFC cable, supplemented by satellite delivery, for its metropolitan-based services.  The partnership will significantly expand its reach into regional areas (presently served by Austar).