Shortly after the new "Metro" dashboard for the Xbox 360 was released to the public, Eurogamer's Digital Foundry noticed that in-dash video was of a poorer quality than the same video played elsewhere. Investigating further—as Microsoft remained totally silent on the matter—it's discovered why: They say the software development kit given to third parties is limited to lower-quality video.
"The obvious conclusion is that the SDK Microsoft is believed to have supplied to third-party video partners is limited to 720p only, leaving Microsoft's host service with a clear quality advantage," writes Digital Foundry, which backs up its work with a very detailed examination of video quality on the Xbox 360 dash.
While the Xbox 360 has no problem whatsoever decoding 1080p video, it is no longer being rendered in native resolution. To illustrate the issues, here we see the same full HD video being run on an older NXE dash at 1080p, and the new Metro offering at both 720p and 1080p. As you can see when clicking on the thumbnails, just about all the detail is being resolved on the older front end, but the Metro dash's 720p and 1080p images are effectively identical in terms of core resolution.
As to why Microsoft would gimp third-parties' video, well: "'Metro' is positioning the Xbox 360 as a competitor against the next generation of Smart TVs we can expect to see appear this year," notes Digital Foundry, "and, via its new Video Marketplace apps, as a one-stop shop for video content on demand." So Microsoft is giving a leg up to the video it serves, not the video produced by others.
Digital Foundry notes that this video issue was reported during the dashboard's extensive beta, according to a tester, but feedback threads about the issue were deleted or marked as fixed without comment. Since then, Microsoft made a very short statement on a forum, suggesting that feedback will be taken under "consideration for future releases," which sounds like shorthand for "don't hold your breath."
What Went Wrong With The 360 Dashboard? [Eurogamer]