Kangaroo 'dead in the water' as UK competition watchdog pulls the plug

Plans to revolutionise television over the internet in the UK dramatically collapsed yesterday as regulators pulled the plug on the venture proposed by the BBC, ITV and Channel 4. The video on demand (VOD) tie-up, codenamed Project Kangaroo, is now "dead in the water", according to insiders.

All three broadcasters yesterday signalled they were unlikely to appeal in the wake of the shock ruling by the Competition Commission.

There was general disbelief at the decision to block the project, designed to provide a catalogue of thousands of hours of programming, largely for free.

Ian Maude, senior media analyst at Enders Analysis, said: "I thought it would be approved but with some serious conditions."

The three channels had been locked in discussions with the regulator over saving the project after it announced preliminary findings in December, which threatened prevention as a last resort. The companies said at the time they would "continue to make the case for [the] service".

One industry insider said the three companies "must have really messed up the process" during the latest round of talks. Even so, up until 6.30pm on Tuesday, they expected a conditional green light.

Instead, the Commission said yesterday it had "decided to block the proposed VOD joint venture". It feared the broadcasters were effectively creating a cartel that would squeeze out rivals in the online market because the BBC, through its commercial arm Worldwide, ITV and Channel 4 control the majority of UK-originated television content.

Peter Freeman, chairman of the Competition Commission, said: "We have decided that this joint venture would be too much of a threat to competition in this developing market and has to be stopped.

"Without this venture, BBC Worldwide, ITV and Channel 4 would be close competitors of each other. We thought that viewers would benefit from better VOD if the parties competed witheach other."

The broadcasters released a joint statement expressing their disappointment. "While this is an unwelcome finding for the shareholders, the real losers from this decision are British consumers," they said.

The decision, which means the loss of 50 jobs related to those brought on specifically to work on the project, was criticised individually by ITV's boss, Michael Grade. He said: "We are surprised by this decision because webelieved that the Kangaroo joint venture, competing in a crowded online world against dominant global brands, was an attractive UK consumer proposition, free at the point of use."

The big beneficiaries of the decision, said one broadcast insider, were companies such as Sky, Virgin Media, Five and BT, who were likely to have lobbied the Commission against Kangaroo.

Yet Mr Maude of Enders Analysis said: "It is a lucky escape as they would have spent tens of millions at the worst possible time for the economy. The companies saw it as a big part of their digital future, but it was poorly thought out." In December, Enders estimated that the companies had already spent £25m on the project. "They should have foreseen the issues with the Competition Commission, but were unprepared," he added.

The verdict marks the end of a project dogged by difficulties since it was announced in November 2007. It was hit by a series of delays, before being referred to the Competition Commission. Ashley Highfield, the head of the project, then announced in November he was quitting just four months into his reign.