The Competition Commission has concluded Project Kangaroo will result in a “substantial lessening of competition in the supply of UK TV VOD content at the wholesale and retail levels”. It will not mean the same in online advertising or content acquisition, the antitrust body said, in a 7am summary of a provisional ruling due later this week - but this is another big blow to Kangaroo’s launch plans.

CC chairman Peter Freeman: “We are concerned that a loss of rivalry between BBCW, ITV (LSE: ITV) and C4C, who are normally regarded as close competitors, could restrict existing and future competition for VOD. Whatever benefits viewers would gain from this rivalry would clearly be lost. The evidence that we have seen tells us that domestic content is key to being able to offer strong competition to UKVOD’s proposed service. The parties control most of that content, putting them in a powerful position in relation to competitors and viewers.

“We think that it would be difficult to obtain content from third parties to match UKVOD’s offer in scale or attractiveness. In this situation, UKVOD would have the ability and incentive to impose unfavourable terms when licensing domestic content to rival VOD providers. At the extreme, UKVOD might withhold content from its rivals altogether. Any reduction in access to content would be likely to impact unfavourably on viewers.”

Kangaroo’s spokesperson told paidContent:UK: “There are definitely remedies that we are able to work with, we do see options that are possible for us.” Only three of the CC’s last 22 rulings have resulted in prohibitions and Kangaroo remains confident it will get to launch, she said. Kangaroo must now propose ways of assuaging the CC’s concerns in a “remedy hearing”, with the CC favouring one of the following…

Much more after the jump, and on our Kangaroo channel

—Prohibition: ie. outlawing the JV pretty much outright.
—Open access: Kangaroo should “offer access to VOD content to third parties (including retailers of VOD services) on, for example, a fair, reasonable and non-discriminatory basis”.
—Rewriting the rules: Kangaroo would have to make “material modifications” to its founding terms - perhaps dropping retail for ITV/C4 shows and instead merely linking to ITV.com and Channel4.com; dropping seven-day catch-up content from iPlayer, ITV.com and Channel4.com; or limiting both catch-up and archive shows.
—Other options ie. ensuring VOD rights for TV shows revert to producers after the seven-day catch-up window.

Kangaroo’s joint response: “Today’s announcement represents the provisional findings from the Competition Commission, at the mid-point in this process. We welcome the commission’s recognition that ‘UKVOD clearly has much to offer’.  We will continue to make the case for a service that will be both in vast majority free and non-exclusive, and of great benefit and value to British consumers. These suggested remedies are not an exhaustive list. They represent possible options that the commission has identified as a starting point for discussion. We look forward to the dialogue on these and other potential remedies with the commission over the coming weeks. The shareholders remain committed to engaging with the commission and will continue to work towards launching the service next year.”

Both rivals and Kangaroo will now feed back to the CC. Kangaroo is likely to favour guaranteeing VOD rights for rivals over other options. But it’s working against the clock - with a February 8 deadline for the CC’s final conclusion, the Kangaroo partners and their rivals may have to go back to the drawing board over Christmas.

The task will fall to interim CEO Rod Henwood, the Kangaroo regulatory adviser who was just upped following the sudden departure to Microsoft (NSDQ: MSFT) of Ashley Highfield. Highfield at Mipcom last month said the service was being developed regardless of the inquiry, targeting a December closed beta test, a date subsequent reports have moved back to January.

The Office of Fair Trading, to which Kangaroo referred itself in April, frustrated the JV partners in June when it asked the commission to rule on whether Kangaroo would operate as a cartel that could unfairly set rates for wholesale VOD TV and for advertising, leading to higher consumer prices. The investigation has heard just such concerns from Joost, Arts Alliance Media, advertisers’ body IPA and TV producers umbrella PACT. But Kangaroo rejected the complaints, arguing against a link between rights for linear and VOD TV, claiming it will have an insignificant share of UK web ads and stressing 90 percent of shows will be free to view.

CC: Release | Provisional Findings | Summary | Possible Remedies

More follows…

• Highfield Quits Kangaroo For Microsoft, Will Lead UK Online Business
• Kangaroo Comes Out Fighting: 73-Page Rebuttal Of Competition Concerns
• @ Mipcom: Kangaroo Plans To Offer US Shows, Movies; Closed Beta Due For Christmas