I don't believe Microsoft will ever make online gaming free.  The cost of providing such services is just too much, especially with the redundant architecture that Microsoft has built up.

So the question is, what would Microsoft have to include in an annual subscription to make an Xbox LIVE Gold membership an unquestionable value?

• Subscription to (1) premium service (Netflix, Hulu, etc)? 
• Unlimited Xbox LIVE Music streaming (Xbox Music Pass required for additional features)?
• 10 Free Skype Minutes per month (requires Kinect)?
• Free access to Xbox TV base service, including channel guide (Xbox TV premium service required for DVR functionality and access to premium channels)?
• Available across all Xbox LIVE connected devices?

I think its a good value as it is. XBL is a great service for the money and they don't need to add anything to keep me paying for my subscription.

This.

Done. And here in lies the issue. Competition is never irrelevant.

I'm not sure what they could add, most likely their TV like service we keep hearing rumors about. Will that be included with the current subscription at its current fee or are they going to create another tier?

Years down the road cloud streaming will probably be a thing, but I know you are talking near future, most likely next gen 2013/2014 future.

It is unquestionable because if you want to go online you have no choice but to pay the fee. This fact alone means most people need to justify paying for a service that is needed to get 100% out of the product. 

Microsoft are on to a winner here. 

It's already a justified cost I guess, but to give it the same value as PSN or Steam it would need to offer a few PS+-like benefits or 2 of your suggestions.

edit: Well to be clear, it is a questionable cost but obviously is justified to millions. 

The reasons the fans show to justify the Live's price are lame. Some say it is for friends, for avatars, cross game chat etc etc. The thing is PSN is the same thing without any cost. I think Microsoft will lose many potential buyers next gen because of this.

There is not really much that they could do that would make it worth the £40 in my opinion. I just want them to lower the price, £15 or £20 a year would be more reasonable.

I have nothing against the 360 but I'm not going to pay for a service just for online play, not as long as I can get it free on PC or other consoles. That was one of the reasons I went with the PS3 this generation. After being a PC gamer only for a few years, I evaluated them both, and that was one of the factors that influenced my decision. It just doesn't sit very well with me.

If the 720 is the same, unless it offers something new and spectacular, then I will probably count that as a negative. They would have to add value, as the OP suggests, in one way or another. As I don't really care much about Netflix or streaming on a console, it would have to be something closer to Sony's PS+, where you get a selection of several games a month at no extra charge.