In addition to adding IM support to the Xbox 360 on Monday, Microsoft effectively flexed its “our digital video is better than your digital video” muscle to its competitors. The company will increase 360 video compression fidelity using H.264 and MPEG-4 Part 2 starting next month (full details here). If that’s too much codec talk for you, what it really means is that the 360 will be positioned as the superior media extender by the numbers when compared to Apple TV and the PS3.

The new firmware update allows 360 users to download and watch video content in full 1080p and High Profile H.264 support, the same advanced setting used in HD-DVD and Blu-ray discs. By comparison, Apple TV only supports 720p and the mainstream consumer H.264 profile, slightly inferior to High Profile. While the PS3 also supports 1080p, it does so at the Main H.264 Profile level as well when not playing Blu-ray movies.

So will the more favorable figures increase Microsoft’s chances in securing the digitally distributed living room? Perhaps slightly, especially when considering extreme video enthusiasts. But again, being sold as a game machine doesn’t help the 360’s specialized digital video cause, at least not on a wide-scale level.

Still, Microsoft was quick to point out in a statement made yesterday that its Xbox Live service was “the largest social network on television.”