Xbox Music will offer Spotify-style streaming as well as downloads and cloud storage features similar to Apple's iTunes, according to Bloomberg.
Sources told the financial site that streaming and cloud storage will be available for a monthly or annual fee, with digital tracks accessible from an online store.
Announced at E3, Xbox Music is expected to offer users access to 30 million tracks. Microsoft is reportedly negotiating with Universal Music Group, Warner Music Group, Sony and EMI in a bid to secure their catalogues.
Xbox Music is tipped to launch later this year alongside Windows 8, and will be available on Xbox 360, Windows 8 PCs, as well as tablets and smartphones.