During his keynote speech at the Consumer Electronics Show (CES) in Las Vegas this week, the computer giant's former chief executive staked Microsoft's claim to what he called the 'connected entertainment' future.
Microsoft entertainment president Robbie Bach joined Gates on the stage to reveal that the Xbox 360 console will be upgraded to support Microsoft's IPTV Edition software by the end of this year.
Xbox users will be able to watch and download TV or films while playing video games or chatting online. The box will also work as a personal video recorder (PVR).
IPTV's web-like interactive capabilities make it the key platform in the future of broadcasting, said Bach. 'This [IPTV] market is going to continue to grow. Over the next three or four years it will become the major part of the TV delivery ecosystem.'
TV technology companies at CES, which was attended by around 140,000 delegates, broadly welcomed Microsoft's move into IPTV.
Red Bee Media's director of emerging technology, Chris Howe, said that Microsoft must 'get into the living room' amid continued competition from Sony, whose next-generation PlayStation 3 is due to launch in the UK in April.
'It's obviously compelling for companies like Microsoft to bring services into the living room via the Xbox and other devices,' said Howe. 'IPTV enables a powerful, rich media experience mixed with the in-depth interactivity that you'd traditionally associate with the web.'
Microsoft's move into TV will also help it compete with an increasingly powerful Apple. Apple's iconic iPod has resisted competition from Microsoft's Zune MP3 player and Apple is expected to enter the IPTV market later this year.
'It's crucial for Microsoft to get into this arena,' said Steve Caddy of the HD-DVD consortium promotions team at CES. 'People below the age of 40 totally understand the importance of IPTV and they're starting to expect web-style inter-activity and search functions on their TV set.'
Caddy added: 'This could be the tipping point for IPTV depending on how Microsoft markets it. If it markets it well, it could be a bigger revolution than HD.'
However, Red Bee's Howe warned that there may be challenges ahead for Microsoft in the UK and European market. The Xbox IPTV upgrade will only be available to UK users if the user's internet service provider (ISP) allows it. BT Broadband customers are likely to be among those with access to the service.
Microsoft has an ongoing partnership with BT, as well as with US telco AT&T, Deutsche Telecom, Swisscom and C-Com in France. Bach said Microsoft is now working with 11 new telco clients, yet to be announced.
It is unclear whether users of the Xbox IPTV service will have access to linear TV channels. BT Vision offers a hybrid Freeview/VoD service, but Xbox may only offer video-on-demand content.
Existing Microsoft content partners include Paramount and Warner Brothers, and entertainment president Bach used the CES platform to announce the addition of Hollywood studio Lions Gate to the roster of content providers.
Red Bee Media had its own platform at CES, where it unveiled a prototype advert that demonstrates IPTV's advanced interactive functionality.
The prototype, demonstrated on a Futarque set-top box with active-TV software, is a reworking of an old Boots commercial created by Red Bee for the Christmas 2005 campaign.
The original ad included basic red-button features such as a product-finder, but the IPTV prototype allows viewers to order and pay for gifts securely via their TV.
The prototype is sponsored by microchip manufacturer AMD. Its desktop division director Leslie Sobon hailed the creative advantages of TV services delivered via broadband rather than cable, satellite or terrestrial.
He said: 'IPTV enables more compelling entertainment experiences for consumers by merging broadcast TV content with interactive and personalised applications.'
This week's 40th anniversary CES is the biggest annual gathering for the technology industry. Other leading executives speaking at the conference included Disney chief executive Robert Iger, Nokia president Olli-Pekka Kallasvuo and CBS chairman Les Moonves.
In previous years, CES has hosted the launch of the DVD, the plasma TV screen and Microsoft's Xbox games console.