July 14 (Bloomberg) -- Netflix Inc. will deliver movies over the Internet to owners of Microsoft Corp.'s Xbox 360 video- game console, helping the largest mail-order film rental service make the transition to online viewing.

The accord, announced at the E3 video-game conference in Los Angeles today, allows customers of Microsoft's Xbox Live Gold service who sign up for Netflix to instantly watch movies and television programs on their TV sets.

Netflix, with 8.2 million customers, already delivers movies to computers over the Internet. In May, the Los Gatos, California-based company began streaming films to TVs equipped with a $99 converter box from Roku Inc. Netflix hopes delivering movies to TVs will help it grow to 20 million users, Chief Executive Officer Reed Hastings told analysts on May 27.

``It's a totally different proposition, so it's quite important,'' said Paul Jackson, a Forrester Research Inc. analyst in London. ``In the future, everything is going to downloads. It's ludicrously inefficient to ship all those silver disks.''

Netflix rose 60 cents, or 2.2 percent, to $27.81 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have gained 4.5 percent for the year. Microsoft, based in Redmond, Washington, fell 10 cents to $25.15.

In an interview, Hastings said Netflix is working on deals to embed its movie-streaming software in devices from three major consumer-electronics companies. The company invested $40 million last year to support the TV service, which Hastings said will add to profit beginning in 2010.

Less Inventory

``We're definitely building up a big head of steam,'' Hastings said. ``2008 and 2009 are the strategic investment years. By 2010 we'll be able to maximize revenue and profits.''

Fewer movies are available online or on demand through viewers' televisions. Netflix has Internet rights to 10,000 movies, compared with more than 100,000 available on DVD, according to the company's Web site. On-demand TV service is included in Netflix plans costing $8.99 to $23.99 a month.

More films will be available as studios negotiate online rights deals for old movies, Hastings, 47, said in May. The lure to studios is that they will get almost all of the money Netflix spends on postage, about a third of its revenue, he said.

``Our key competitive strength is our ability to combine'' downloads with Netflix's DVD-by-mail service, said Hastings, who said the company offered only 2,000 titles for online viewing as recently as last year. ``We've expanded online content very rapidly, and we'll continue to.''

International Sales

Digital distribution will help Netflix expand internationally, Piper Jaffray & Co. analyst Michael Olson wrote in a May 29 report.

The more flexible service should also help reduce customer cancellations, Forrester's Jackson said.

Sony Corp. also plans a video-download service. Kazuo Hirai, chief executive officer of the company's computer entertainment unit, told investors last month Tokyo-based Sony would offer downloads to the PlayStation 3 and PSP portable game player as early as this summer. More details will be outlined at the company's E3 presentation on July 15, he said.

Xbox 360 will be the only game system that lets users access Netflix, Hastings said.

Separately, Microsoft announced an agreement with General Electric Co.'s NBC Universal to offer television shows and movies through Xbox Live. Customers will be able to rent episodes of shows including ``Monk'' and ``Heroes'' and films such as the ``Bourne'' movies, Don Mattrick, Microsoft's senior vide president of interactive entertainment, said in a presentation.

Microsoft has similar agreements with Walt Disney Co. and Time Warner Inc.'s Warner Bros., the company said in a statement.

Netflix has released few statistics about customer response to online viewing. Roku executives said June 9 they had a two- to-three-week backlog in shipments because the company's initial inventory of converter boxes quickly sold out.

To contact the reporters on this story: Tim Mullaney in New York at Tmullaney1@bloomberg.net; Michael White in Los Angeles at mwhite8@bloomberg.net.

Last Updated: July 14, 2008 20:54 EDT