Anyway, this instant 1080p business. It works quite well from my initial tests, though the name is misleading, because it doesn't instantly start in 1080p. Instead, it begins playing almost immediately in a much lower-quality mode, then buffers itself up to full quality as fast as your connection will allow. The video timeline has a handy connection meter showing what quality level you've buffered up to that sits in the upper right, as seen below. It's divided into three bars and then an "HD" indicator; as far as I can tell, once the HD icon lights up, you've hit full quality. That took around 10 seconds even over the 360 Wi-Fi adapter to our shared Internet connection in the office, so in most cases you're probably going to hit 1080p before you get through all the studio logos at the front of a movie.
Microsoft provided us with a 24-hour rental of Harry Potter and the Chamber of Secrets to test this feature out, and here's how the movie looked immediately after hitting Play from the Zune Marketplace. (Full-size version here. Right-click and Save as, if your browser doesn't display the full pic.) As you can see, the image is pretty rough, with a lot of visible compression artifacts at the outset.
You can skip between chapters just like on a DVD, which happens more or less instantly, though of course you have to buffer back to HD each time you do it. I wish there were some kind of way to see all the chapters broken out in a list, but what can you do? You can also seek forwards and backwards at up to 32x, which happens instantaneously, even into territory you haven't buffered yet. At the higher speeds, seeking will only display single frames as you go.
So the tech works great, but the pricing of these movies still sticks in my craw. You're looking at between $6 and 8 U.S. for a 24-hour rental of new releases, which is cheaper than going to the theater but seems like highway robbery next to a $20 Netflix account that offers Blu-rays in the mail and unlimited streaming on the same console. Netflix's streaming selection remains pretty limited, though, so I could see this service being cool for impulse-watching the latest flicks. It beats driving to Blockbuster, anyway. Who still does that?
Show of hands: who regularly rents or buys movies on their Xbox already? If you don't, will this new upgrade make you start? (If you want to see all the new features of this latest update, including the movie in motion, you could always watch our quick look.)
EDIT: Upon inspection, the rentals I've found in the Marketplace actually range from around $4.50 to $6. I guess that means the Microsoft Points system is doing its job.