The question is that if you're a cable company and you're trying to sell all your pay per view and movies on demand catalogue on top of your multi-tiered subscription with little or no competition, why would you put a MS machine in the mix that can get in front of your customers and sell them the same content through the MS store front instead of your own? It would basically be the equivalent of allowing the cable subscriber to watch movies through netflix using their HDPVR, essentially that would introduce unnecessary competition to their on-demand services.
I can understand if you're samsung or some other TV manufacturer not called Sony, and MS wants to throw in a free xbox720 where you really don't have anything to lose, but for cable companies giving MS your piece of the real estate in terms of store front in the content provider business makes no sense, even if MS would give their boxes away for free, unless MS is willing to give away a gimped set-top box version that does not work through the xbox live marketplace which would kind of defeat the very purpose of MS wanting to channel as much content through their own platform as possible.
Potentially, maybe MS might try to make a play at the content provider business through their box kind of like Apple TV but trying to get the cable companies to play along might not be an easy thing, they might as well try to buy up Time Warner or Direct TV.
This is the big question.
Three things we know is that the MSOs will protect their 1st-run PPV movie and PPV events business at all costs, they do not want too granular "a la carte" TV packages that they don't control, and that they are rather desperately seeking a strategy that prevents them from being turned into a "dumb pipe."
Aside from UFC events, I don't think MS is currently selling any of the aforementioned PPV content. If they enter a partnership with the MSO's they'll likely have to give that up, but that's a drop in the bucket.
There are real questions in the industry about the profitability and sustainability/viability of all the major MSOs' "On-demand" services that don't fit into that highly-profitable 1st-run PPV movie/event category. Some industry watchers have described their efforts (as well as services like Amazon/Netflix) as a "loss leader" so there are real questions about whether they would care if they could hand it off to a partnership that would carry some of the costs.
Presumably, MS has a plan and marketing strategy in place for these companies to convince them that entering into a partnership will be better for them in the long run than the seemingly long, inevitable march to "dumb pipe" status that they seem to be on now. Nobody really knows what that sales pitch from Microsoft is, but they must be saying something to the MSOs that is sticking, if this is really what they're moving forward with.