One of the major complaints many users have had after upgrading their Windows Media Center PCs to Widows 8 is that the video playback quality when using an Xbox 360 as a Media Center Extender has dropped off significantly. Microsoft has released a cumulative update for Windows 8 that claims to correct this issue. We’re not able to test it right now (since we’re about 1500 miles away from our Media Centers) so please let us know how well it works out for you.
Thanks to John for the tip!
Source: Microsoft Support