Use of embryonic stem (ES) cells in regenerative medicine requires the development of robust clinically relevant bioprocesses for the production of ES-derived cells. We improved upon current mouse ES cell culture methods by developing a serum-free defined culture system amenable to controlled cytokine delivery. We enhanced blood development by specifying the quantity and timing of bone morphogenetic protein (BMP)-4, vascular endothelial growth factor and thrombopoietin exposure. We also developed a cytokine delivery system for growing embryoid bodies (EBs) based on the binding of BMP-4 to functionalized agarose microcapsules. We demonstrated that immobilized BMP-4 can be delivered to the developing EB, inducing at least 60% of the cells to express mesoderm-associated markers. These results suggest that this delivery system could be used for the development of scalable bioengineered niche for EB-based blood generation. This process represents a cost effective and robust platform for generating ES cell-derived functional cell types.