Microsoft Corp (MSFT.O) is about to jump back into the TV game. Only this

RELATED ARTICLES IPL is like a reality show on TV with all the colours

time, it may aim at cable, satellite and phone companies.

The software powerhouse has held talks with TV networks to create a new subscription-based TV service on its Xbox gaming console that would rival efforts by Google Inc (GOOG.O), Apple Inc (AAPL.O) and Netflix Inc, sources told Reuters.

Microsoft's latest explorations after investments in MSNBC and WebTV come as efforts to redefine living room entertainment have accelerated in the past year, with technology companies seeking to offer lower cost alternatives to pricey pay-TV subscriptions.

One scenario under consideration by Microsoft is to create a new TV service on its Xbox gaming console that would establish a "virtual cable operator." The service would charge a monthly fee for access through the Xbox to networks such as ABC, NBC, Fox, CBS, ESPN or CNN, according to two sources familiar with the plans.

Other options include allowing cable subscribers to use the Xbox to watch shows with more interactive functions. Viewers could, for instance, message with friends over the console while viewing their favorite shows.

Microsoft is also exploring the possibility of creating programming packages for customers, setting up a bundle of sports or children shows, for example, these people said.

In addition, it could sell more individual channels, such as an HBO or Showtime, directly to subscribers. It already has Walt Disney Co's ESPN on the Xbox Live online service.

These people said a service may not arrive for another 12 months, but early discussions have been productive.

Microsoft declined to comment. The people involved in the talks asked not to be identified as the discussions were confidential.

News of Microsoft's plans come as the pay-television industry are moving to allay investor concerns that consumers are fleeing expensive subscription packages for cheaper online services operated by companies such as Netflix Inc and Hulu, which both charge $7.99 per month for streamed shows and movies. The phenomenon is called "cord-cutting."

The worry is that so-called over-the-top services could undermine the lucrative cable TV industry, whose dual-revenue stream model has made pay-TV one of the most resilient sectors during the economic recession.

Cable networks such as ESPN are paid carriage fees by pay TV operators and also earn revenue from advertisers.

But programmers have said they would welcome new types of competition to the cable and satellite companies.

Speaking at the Reuters Global Media Summit on Monday, News Corp Chief Operating Officer Chase Carey said the arrival of alternative TV services gives cable and broadcast networks yet another way to reach fragmented audiences. News Corp is parent of Fox Broadcasting.

"The emergence of platforms like that -- from people like Microsoft which is really more a theory at this point, or Netflix -- increases the value of content and brands and those who create the content and channels that actually the business and drives consumer demand," Carey said