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Is Microsoft preparing to compete with Netflix?

A wire service reported that Microsoft is in early talks to license network TV content.

Microsoft wants to build a pay-TV subscription service to offer to Xbox Live customers, according to a published report.

Citing two anonymous sources, Reuters reported today that Microsoft has spoken with media companies about licensing "TV networks."

The talks are in the early stages, according to the report from the wire service, but some of Microsoft's proposals include offering individual channels, such as HBO or Showtime, directly or "using 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," Reuters wrote.

A Microsoft spokesperson was not immediately available to comment but the company has recently signaled that it was interested in making a bigger investment in entertainment. One of the reasons Microsoft gave for boosting the cost of Xbox Live Gold membership fees this year was that the company had spent considerable amounts of money on infrastructure, as well as content licensing.

It makes sense that Microsoft wants to expand Xbox Live's digital-video service. Much of the Web-TV sector is struggling to catch up to Netflix's streaming-video service. The popularity of Netflix's Watch Instantly offering is ballooning as consumers search for cheaper alternatives to traditional pay-TV services. It seems logical for Microsoft managers to look at Netflix's success on Xbox Live and ask whether they couldn't offer others the same opportunity to market to their customers or maybe cut out the middlemen all together.

The major studios and TV networks would likely offer a warm welcome to Microsoft.

Two years ago, when the Xbox Live gaming and digital-media delivery service was increasing in popularity, some of the major studios tried to encourage Microsoft to build up the Xbox download store and not offer Netflix's streaming rental service, two studio execs told CNET at the time.

The thinking then in Hollywood was that Microsoft would sell downloads of TV shows and films and be less of a rental service. Microsoft ended up partnering with Netflix anyway and the relationship was a huge hit for both companies. In addition to Netflix, Microsoft operates its own built-in movie marketplace that sells downloads and offers streaming video rentals.

Staff writer Josh Lowensohn contributed to this report.