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Microsoft: 'Virtual MSO'?

12:25 PM -- Rumors that Microsoft Corp. (Nasdaq: MSFT) is working on an over-the-top Trojan Horse video strategy have been brewing ever since the company unleashed the original Xbox gaming console back in 2001.

It appears that those rumors are now inching toward reality with word that Microsoft has held discussions with media companies about licensing TV networks for distribution to the company's Xbox 360 console, PCs, and other broadband-connected devices.

Reuters, citing multiple sources, says those discussions are paving the way for Microsoft to become a "virtual cable operator" that distributes TV content via broadband for a monthly fee.

That service, believed to be at least a year out, would certainly apply pressure on other OTT video providers, including Apple Inc. (Nasdaq: AAPL) and Boxee . But an embedded base of millions of Xbox 360s with subscription video potential would obviously cause some disruption for traditional cable operators and telco and satellite TV service providers, particularly as the "cord-cutting" hype engine gathers steam and consumers, hit hard by a tough economy, seek out less expensive video packages. (See No-Frills Cable TV .)

Even if the service is months away, Microsoft has already made some video progress with the Xbox 360, which already has access to the Netflix Inc. (Nasdaq: NFLX) streaming library and ESPN3, a broadband video portal that offers video clips and a range of live events, but still requires the user to subscribe to an ISP or MSO that has a deal to carry the regular ESPN TV channels. (See ESPN Feeds Fare to the Xbox 360.)

Plus, the Xbox 360 has shown it has the chops to morph into a set-top capable of delivering a full suite of on-demand and live video services. Among recent examples, the console has been adapted to support the AT&T Inc. (NYSE: T) U-verse IPTV service. AT&T started supporting the Xbox 360 as a U-verse receiver in mid-October. (See Xbox 360 Joins the U-verse Lineup .)

— Jeff Baumgartner, Site Editor, Light Reading Cable

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