Last week, somebody tipped Engadget off to a blog post describing an upcoming “rumored” HDTV download service for the Xbox 360. The post was quickly pulled by the relatively obscure blogger, but it now appears that there may have been quite a bit of truth in what was said. In an important development for Microsoft’s digital strategy, they announced today that they will be supporting downloadable movies to the Xbox 360.

“I think as you look at the media landscape and the gaming community and the potential for digital convergence, Xbox users become a great potential audience for movie content,” said Thomas Lesinski, president of Paramount Pictures digital entertainment. “This provides us with the opportunity for (video on demand) in a box. The key takeaway in this is there are lots of rabid gamers in this community, and we know they’re fully involved in movie consumption. And given the way these consumers multitask, the convergence of movies and Xbox is really a natural.”

This is a big step for Microsoft because it takes their Xbox 360 beyond just being a gaming machine, and transforms it into a digital media hub. Already Microsoft has allowed streaming HDTV to the Xbox 360, but only if you have a Media Center. Thanks to a recent update they now also support streaming .wmv movies from Windows XP as well, but this move marks a step into new territory for the company.

The service won’t come without a few restrictions. First and foremost, you have to have a premium Xbox 360 with the internal hard drive built in to be eligible for the downloads. This is likely due to piracy concerns by the studios, but it also means that the basic Xbox 360 I bought from eBay scalpers last year won’t work with the service.

Microsoft also hasn’t announced pricing yet, although if the Engadget rumor is right, it should come in at $4 per movie which would compete directly with the pricing for in store movie rentals. The content will also be a bit skimpy early on, which will come as no surprise to anyone who has tried any of the movie downloading services over the last few years. Initially, Microsoft will be sticking with the titles that are most likely to be popular with the gamer community, but if this turns out to be successful, you can bet that the studios will open this up to a more mainstream audience.

Microsoft’s move will likely be seen as a preemptive attack on the upcoming PS3, but the service will likely create a much bigger headache for Steve Jobs, who has preannounced, but has yet to release Apple’s own iDongle video strategy.

With Microsoft’s ability to support HDTV downloads and having the ability to play video games on the system, it’s going to make it all that much harder for Apple to convince people to fork over $300 dollars in order to have the privilege of being able to pay for VOD films. By adding the service as an extra feature instead of a primary feature, it may limit the appeal of the service to the gamer community, but in the long run Microsoft stands to gain a much larger overall footprint into the digital home. While I can’t say that this move wasn’t expected, nor will it radically change Microsoft’s digital troubles overnight, it’s still a smart and logical move to make on the eve of the PS3 and iTV release.