The service is due to launch officially in six months
Soapbox starts testing on Tuesday and will launch within six months as part of current service, MSN Video.
"It's really early days in online video; this is still act one," said MSN's Rob Bennett.
YouTube had 34 million visitors last month, according to Nielsen/NetRatings, while MSN Video attracts about 12m.
"We're definitely not blind to the fact that YouTube has a big lead right now," said Mr Bennett, general manager of MSN's entertainment and video services.
The video-sharing market has proved increasingly popular with users in the last 12 months with services such as YouTube crossing over into mainstream success.
MSN Video was once the most popular video site until fans of user-generated content propelled YouTube, MySpace and Google past Microsoft.
MySpace video receives 17.9 million visitors a month and Google Video attracts 13.5 million each month, according to Nielsen.
"Microsoft is jumping on this bandwagon with some uncertainty with where it's going, but the company believes it needs to be on board," Joe Wilcox, an analyst at Jupiter Research, told Reuters news agency.
The testing period is by invitation only although users are encouraged to apply for invitation on the website.
However, the site was hit by a technical problem on Tuesday which told users: "Oops. It's not anything you did - it's us. Our site's down. Please try again later."
Microsoft has said it will take down any copyrighted material uploaded by users without permission once it is alerted by the rights holder.
The firm said the service would work with users of computers running both Windows and Apple operating systems and would support browsers including Internet Explorer, Firefox and Safari.
Soapbox will also support a number of video file formats and delivery methods, according to Microsoft.
An early review of the Soapbox beta by website Cnet said it was "disappointing"."It's a slightly better sharing service than YouTube in some small technical ways," wrote Cnet's Rafe Needleman.