The interior of a Microsoft retail store is seen in San Diego. Credit: Reuters/Mike Blake
The set-top box would run the Windows 8 operating system as an 'always on' device
that booted in a matter of seconds.
Microsoft's hope is to ensnare the casual consumer who would not pay the full price tag for a console, but might play games on their television in between streaming video and watching films or TV programmes, the Telegraph reports.
According to the paper, Xbox TV is expected to be available from next year.
The Verge quoted a spokesman for Microsoft, as saying that 'Xbox 360 has found new ways to extend the console lifecycle by introducing controller-free experiences with Kinect and re-inventing the console with a new dashboard and new entertainment content partnerships.'
"We are always thinking about what is next for our platform and how to continue to defy the lifecycle convention," the spokesman added.
The set-top box work is part of a broader effort by Microsoft to distribute its Xbox Live services across a number of devices.