Peter Molyneux confirmed today that the upcoming Fable III will not only be released on disc, but also in episodic form on Xbox Live Marketplace. This was announced at GameHorizon in Newcastle.

This concept was tried with Fable II to great success, raking in over $15 million in revenues.

“Soon after the retail launch we’re doing episodic,” said the Lionhead boss. “We break it down in chapters. We give away the first chapter entirely free, the first hour.

“When you reach a certain point in the game it says ‘thank you for playing the pilot of Fable 3, do you want to spend an extra 2-5 or whatever dollars to buy the next episode, or buy the whole lot?’ Press ‘yes’ and you will immediately continue playing.”

Molyneux is also hopeful the game will sell close to 5 million units. Fable III releases October 26 on Xbox 360 and PC.