While you don't necessarily need pay TV, the one gap in internet video service has always been the lack of live sports. According to the New York Times, Microsoft and Disney are looking to change by bringing ESPN to your Xbox Live.
Xbox Live users in the States can already access Netflix and Last.fm, but this move towards live streaming content would be a major one towards killing off cable once and for all. Especially since it targets a dedicated audience (sports fans) that has significant overlap with Xbox Live's built-in gaming community.
The deal would be based on a per-subscriber fee, and would include live streams of sporting events and possibly also interactive games that incorporate the ESPN brand. We'll update with more details if and when they're available. [NY Times]