The streaming service brings a library of more than 30 million songs to Xbox 360 consoles, Windows 8 PCs, tablets and smartphones.
Xbox Music will replace Microsoft's Zune service and is expected to compete with the likes of iTunes, Spotify and Pandora.
The announcement is part of the company's continuing efforts to turn the Xbox 360 into a fully-fledged living room entertainment system.
Microsoft also announced its Xbox SmartGlass service during its E3 conference, used to integrate tablets and smartphones into the Xbox experience by sharing media across different platforms.
It was also confirmed that Internet Explorer is coming to the console, and more than 35 entertainment providers heading for Xbox Live.