The maker of the Windows operating system has proposed a range of possibilities in these early talks including creating a "virtual cable operator" delivered over the Internet for which users pay a monthly fee.

Other options include using the Xbox to authenticate existing cable subscribers to watch shows with enhanced interactivity similar to how pay TV operators have sought to do over the Web, said these people.

Microsoft is also exploring the possibility of creating content silos and selling more individual channels directly such as an HBO or Showtime. It already has Walt Disney Co's ESPN on the XBox Live online service for example. These people said a service may not arrive for another 12 months, but early discussions have been productive.

Microsoft said it does not comment on rumor or speculation. The people involved in the talks asked not to identified as the discussions were confidential.