Microsoft is developing a music and video service and device to compete with Apple's iPod and iTunes, Reuters reports.

The report says the Microsoft team working on the project is being led by Robert Bach, who led the development of the Xbox video game business. Bach became president of Microsoft's entertainment and devices division after the company was restructured in December.

The company has held licensing discussions with the music industry and is already demonstrating the entertainment device, sources told Reuters.

The report also claims the service will be an improvement over iTunes, which an unnamed source calls "the 7-11 of music stores".

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