WinRumors claims that Microsoft will announce the Xbox LIVE Diamond TV service at E3 and that they are competing with Apple's iCloud in securing "the necessary agreements in time". With the Kinect, the already attractive Netflix app, and Microsoft's investments with ESPN, Netflix, and Hulu, the prospect of a "virtual cable operator which will be developed over the Internet and charged with a monthly fee" is not too farfetched.
I'm a bit weary on the name: XBOX Live Diamond is a discount card that people who had a XBOX Live 12-month subscription could request for discounts with participating merchants - a coupon card. It would be strange to repeat the name. I'm not certain if Microsoft also wants to compete against all the major cable companies.
Conclusion? I'll wait until Monday at Microsoft's press conference at E3 to see if this has any truth to it.