Microsoft is making a yearly tradition of updating the Xbox 360, once again bringing new features to the console.

This time around, the main attractions are ESPN, Zune Pass (if you have a subscription) and a better version of Netflix. The Xbox 360 software also gets a minor face lift. Microsoft let me try the new Xbox 360 software before its public release, and while I can’t take full advantage of ESPN (more on that later), the other changes are still enough to solidify the Xbox 360’s standing as the best software experience on a game console — provided you’re willing to pay for Xbox Live.

Let’s go over the major changes in the Xbox 360’s software update:

Netflix: Finally, the Xbox 360 offers a complete version of Netflix, thanks in large part to the addition of search. Every time you add a letter to your query, Netflix shows up to 25 films that match your criteria. If the movie you seek is only available on DVD, you can add it to your mail order queue and get recommendations for similar movies that are streaming. I’ve still got a few nitpicks — search by genre, actor or director would be nice, and I’d like to see a list of similar titles for every film, not just the ones that are DVD-only — but the bottom line is that Netflix for Xbox 360 no longer feels like it’s tethered to a PC.

Zune Pass: Microsoft’s all-you-can-eat music streaming service is predictably functional. From the console, you can search for artists, albums and songs, peruse by genre, create a playlist and build Pandora-style radio stations. The ability to look at what your Xbox Live friends are listening to — it’s the return of social — is a nice touch, because it’s so effortless. My major gripe with Zune Pass is that it won’t multitask; that is, you can’t use the service while playing games or doing anything else with the console. (The existing Last.fm radio service suffers from the same problem). Also, Microsoft could really use different logos and color schemes for Zune Video and Zune Music, especially because each one sends you to a different marketplace.

ESPN: Arguably the most exciting addition to the Xbox 360, the ESPN channel brings live sports and highlights from ESPN3.com to your television — that is, if your Internet service provider already carries ESPN3 (here’s the list of ISPs that do). Because I’m unfortunate enough to live in Los Angeles, where Time Warner Cable reigns, my ESPN experience on the Xbox 360 is limited to a handful of sad little clips from ESPN’s main website. (On Monday evening, it took me about 20 minutes to watch everything.) Time Warner has reached an agreement with Disney, which owns ESPN, but ESPN3’s availability date is still unknown. And unlike most ISPs, which have tied ESPN3 to their broadband services, Time Warner will only make ESPN3 available to television subscribers. Cord-cutters, myself included, are out of luck. I’ll have to update this review if I ever leave L.A., hopefully for a service provider that isn’t hell-bent on preserving its old business model.

Family settings: My experience with parental controls is nil (ask me again in a few years), but I’m glad to see some new features for families. Users can now hide mature content from the dashboard, set intelligent controls for each family member based on age and — this is really useful — create exceptions, should you wish to let your teen play Halo without opening the M-rated floodgates completely.

Note that the first three features on the list are only available to Xbox Live Gold subscribers. Microsoft set an early precedent for putting major features behind a subscription wall, when it launched Netflix for the Xbox 360 in 2008. Combined with an excellent multiplayer service, they’re still worth the $50 (soon $60) per year.

Sony’s Playstation 3 has the Xbox 360 beat on hardware, with support for Blu-ray and 3D, but it’ll have a harder time catching up on software now.

 
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Read more: Gaming, Microsoft, Xbox 360, Xbox Live