"They built Microsoft TV, they demoed it for us, they asked for rate cards but then said 'ooh ah, that's expensive,'" the piece quotes one "senior media executive" as saying with regards to the negotiations. That doesn't mean that the plans are a total wash, just that they're currently not progressing.
Still, some avenues for live television are currently available and coming soon to Microsoft's Xbox 360, including a limited selection from several cable providers, as well as the just announced partnership with Newscorp which will bring Fox News, The Wall Street Journal and more to the console.
Update: Microsoft has issued this statement regarding the Reuters report, "We don't comment on rumors and speculation. Microsoft is committed to working with the world's leading TV and entertainment providers to bring their offerings to Xbox and transform the TV experience with the power of Kinect. We are continuing to launch the more than 40 new entertainment partners we have already announced, including a wide range of live and on-demand TV on Xbox. Moving forward, you can expect to see more of the world's leading entertainment providers coming to Xbox."