The music service, which The Verge site said would "integrate deeply with Facebook" and not require any browser plug-ins to work, is expected to be unveiled at the E3 Gaming Expo in June, CNET.com reported Wednesday.
In entering the streaming music arena, Microsoft will be up against a number of entrenched competitors including Spotify and Pandora.
Microsoft made a previous attempt at a music streaming service with the Zune Music Pass and Urge but with little success.
Microsoft's new service will feature a "scan and match" capability, similar to iTunes Match, that will let users find songs from their current library within the platform, sources told The Verge.
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