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If you’re a Netflix subscriber and like gaming in any way, drop what you are doing immediately and go buy an Xbox 360. If you have an Xbox 360 and like movies in anyway, go sign up for Netflix immediately. Yes, the rumors were true. Microsoft and Netflix are teaming up to bring its “Watch Instantly” feature to the Xbox 360 gaming device this fall.

With one fell swoop, Microsoft may have dealt its strongest blow in the consumer market to Apple in years. Considering Microsoft also added new release films from the likes of MGM and Universal to its Xbox Live service, the addition of Netflix could render the Apple TV a second-tier living room product.

As a commenter said upon hearing the news in our live E3 coverage FriendFeed room: “Makes Xbox move from want category to NEED category.” I have to agree. I was deciding between a Netflix Roku box and an Apple TV, now you can kiss the desire for both of those goodbye.

Microsoft says the presence of Netflix will double the number of movie offerings available on Xbox Live. In fact, Xbox 360 users will now have access to over 10,000 Watch Instantly movie titles.

Netflix also has a deal with the aforementioned Roku box, but it is non-exclusive, and we’ve known for months that Netflix was going to bring its Watch Instantly service to other boxes. Roku made headlines recently be saying it would soon open its device to other services beyond Netflix as well. I wrote at the time that such a move could make Roku the living room Trojan Horse, but I’m changing my stance now: The Xbox 360 is the living room killer app.

A Netflix partnership with Microsoft has been rumored for months since it was clear Microsoft was serious about dominating the living room — and Netflix chief executive Reed Hastings is on Microsoft board of directors.

The two services will also now offer a Live Party feature which will allow users to watch movies together over Xbox Live virtually. This is an interesting move, one similar to what Lycos is trying to do with its Cinema service. Will people watch movies together virtually? Such an idea might be fun if you were interested in watching a movie Mystery Science Theater 3000-style, otherwise, I don’t know about you, but I don’t really like to interact with others while watching a movie.

A word of caution: For those who have neither an Xbox 360 or a Netflix account this could be an expensive proposition. The Xbox will run you at least $279 (the slightly better version just got a price cut as well) while an Xbox Live account will cost $50 for the year. On top of this, Netflix will charge you somewhere between $5-$20 a month depending on how many movies you want to rent at once.

That said, all of these costs come with considerable other “perks.” With the Xbox 360 you’d be getting a great next-gen gaming system. With Xbox Live you’d also have access to play the majority of these games online with other people. With Netflix, you’ll get access to a massive amount of movies either online or by mail.

I’ve long thought the Xbox 360 was superior to the Apple TV as a living room digital entertainment device — and not just because of the gaming factor. Apple TV changed my perception a bit with the ability to rent movies, but now the 360 is back with a vengence.

How will Apple and the others competing for the living room space respond? Will one of them sign the NBC and Fox-backed online streaming site Hulu? Will one sign the closer-to-death-than-to-digital Blockbuster?

Oh and one more thing: NBC television shows will be coming to Xbox Live as well. NBC last year had a major falling out with Apple that caused it to pull all of its hit shows from iTunes. Consider this a poke in the eye to Apple, but the larger news is Netflix. This is a huge deal.

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