Microsoft tackles interactive TV, starting with ads

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If Microsoft has its way, you won't just watch commercials.

The tech company is betting big on interactive TV as the way of the future. Its Xbox Entertainment Studio is using new technologies, including Kinect, to develop content that people do more with than passively observe.

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"I think there are a lot of ways you can get a commercial message across," said Nancy Tellem, president of Microsoft's Xbox Entertainment Studio, at the Paley Media Center Summit on Thursday. "So I believe in advertising—I just don't necessarily believe in the way it is incorporated in broadcast or cable is the most effective way.

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"With this platform you can actually engage the audience, and the audience can give back so you can close off this gap. So that's what we are looking at, more interactive ads."S

While subscription services such as Netflix and Amazon Prime enable users to consume content without commercial interruption, Microsoft will incorporate ads in the Xbox content-streaming service—but they will be creative spots that people interact with, Tellem said.

"It starts with great content," she said. "All of these different features, these interactive features are something they want to engage in provided that the content resonates with them. They want to be more involved with the storytelling, so technology at this point will enable them to engage even more so."

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Microsoft's approach to interactive TV is driven largely by the target audience: millennials, Tellem said.

"We are looking to go to the next iteration of TV and change the experience," she added. So what you have is the SmartGlass or Kinect technology, and we are looking at what the millennial audience wants to do. ... [They want] to lean in as opposed to lean back with new technologies."

—By CNBC's Cadie Thompson. Follow her on Twitter @CadieThompson