The Verge reports that the computing giant will lift the lid on a Spotify-esque application called Woodstock at the Los Angeles expo.
The platform will go head-to-head with Spotify and Sony Music, supporting cross-compatibility with Windows Phone devices, as well as iOS and Android.
A feature equivalent to iTunes Match, which could allow subscribers to access their music collection over the cloud, is rumoured to be in the testing phase.
Microsoft previously moved to stamp out speculation that it will be unveiling a successor to the Xbox 360 at E3.
Woodstock has been tipped for a Q4, 2012 launch following the release of the Windows 8 operating system.