Rumour: Microsoft unveiling Xbox subscription TV service at E3

It’s been roughly four years since talk of Microsoft deploying an IPTV service on its Xbox Live gaming platform first started making the rounds. And while eager gamers and home entertainment buffs can’t exactly dial up The Soup across Xbox Live just yet, Microsoft has certainly been pushing toward building a complete living room experience into its gaming system.

While gamers have seen and appreciated the fruits of Microsoft’s digital labors–ESPN streaming and on-demand content, Netflix integration, and last.fm and Zune-based streaming music, to name a few–the company hasn’t made a great deal of progress on tackling the elephant in the room: Full-fledged television. But new rumors are surfacing that this year’s E3 Expo will finally herald Microsoft’s big push into streaming TV on Xbox Live.

The project, dubbed Xbox Live Diamond, will allegedly combine Microsoft’s Mediaroom IPTV with Xbox Live itself. That could incorporate television streaming from various content providers (that Microsoft is allegedly in last-minute negotiations with in order to have its agreements in place prior to the service’s alleged E3 demonstration). As well, the service could blend in the avatar and interactive-based functionality of Xbox Live (already present in Microsoft’s ESPN offering) and the gesture-based controls of Microsoft’s Kinect hardware (control your channel-surfing with a wave).

Microsoft’s rumored proposal to media companies suggests that the company’s Xbox Live service would become a “virtual cable operator” of sorts. Existing Xbox Live users would pay a premium to access the enhanced Gold service, which would grant them access to streaming shows and channels–though there’s been no suggestion as to whether this would be a one-shot fee for all programming or whether Microsoft would employ a tiered pricing structure a la typical cable packages.

Microsoft is also allegedly considering delivering additional branded channels analogous to its current ESPN offering. These one-shot programming options–like an HBO channel, for example–could be sold on an a la carte basis to Xbox Live users.

The streaming television rumor-mongering was kicked up a notch earlier this week as the result of comments made by Microsoft corporate vice president Frank X. Shaw. He fanned the E3 announcement flames in a Tuesday post to the Official Microsoft Blog, where he noted that Microsoft was keenly aware of the fact that 40 percent of all current activity on Xbox Live isn’t gaming.

“The vision for Xbox is straightforward: All of the entertainment you want. With the people you care about. Made easy,” Shaw wrote. “That is why you’ve seen us invest in partnerships with ESPN, Netflix and Hulu. That is why we’ve baked social directly into the experience with Xbox LIVE – connecting gamers, friends and families across the globe. That is why you’ll see Xbox marketed more as an entertainment brand this year. And that is why we’re investing so much in Natural User Interface technologies (speech, touch, gestures) to make the entertainment experience that much easier—and more fun.”

At the very least, Xbox Live users can take solace in the fact that Microsoft’s rumored television service will be a lot more fun than its previous attempts at an Xbox Live Diamond program.