It makes changes to the way users navigate around the console's dashboard and speeds up many common tasks such as checking what friends are doing.
It also adds backwards compatibility to the console so it can play many older Xbox 360 games.
Initially, 104 older games, including Gears of War and Mirror's Edge, will be playable on the console.
The update started to roll out to consoles at 07:01 GMT, but it is being staggered because it needs to be being applied to more than 12 million devices.
The big update changes the console's underlying operating system so it works better with Windows 10 - the latest release of Microsoft's flagship software. Before now, the underlying software of the game system was much closer to Windows 8.
It changes the dashboard, and a further upgrade next year will add some specific Windows 10 features to the Xbox One such as the Cortana voice-driven query system.
It also removes some older features, including the gesture-based control system and menu layout required for the Kinect motion sensor.
The addition of backwards compatibility for older games will be activated in an update due to start 12 hours after the first global rollout.
The long list of games supported includes a lot of very old titles such as 1992's Wolfenstein 3D, but also some more-up-to date ones such as Assassin's Creed II.
Microsoft has said games including Halo Reach, Call of Duty: Black Ops and Skate 3 will be added to the list next year. It is also accepting nominations for games to add to the roster of older titles via its Xbox feedback site.
Xbox 360 owners who upgrade to the newer console will get copies of their older games on the Xbox One at no additional cost.
Sony has set its face against providing backwards compatibility on its PlayStation 4 console. In October, Sony Europe head Jim Ryan told Europe told Eurogamer that it was a feature that "was not used very much."
Early reviews of an updated console suggest it does improve basic navigation tasks.
"It feels like Microsoft is now recovering from its giant Xbox One launch mess, and the company has the right focus for its games console, said Tom Warren on tech news site The Verge.
However, he added, the update still had some "issues" with multiplayer-gaming and TV integration that had to be addressed in future updates.
Microsoft has acknowledged many of these problems on a dedicated support page and given advice about how to troubleshoot and fix them.
A big update for Microsoft's Xbox One is due to start downloading to consoles around the world on Thursday.