The Competition Commission has criticised plans by Channel 4, the BBC and ITV to launch an on-demand video service as anti-competitive.
The so-called Project Kangaroo would "hurt competition" and lead to a "substantial lessening of competition in the UK video-on-demand market, says the Government watchdog.
The three broadcasters had planned to sell current programmes from ITV and C4, and archived shows from the BBC, online. The service would not replace the BBC iPlayer, which offers current shows for free.
Competition Commission chairman Peter Freeman says: "We are concerned that a loss of rivalry between BBC Worldwide, ITV and C4, who are normally regarded as close competitiors, could restrict existing and future competition for video on demand. Whatever benefits viewers would gain from this rivalry would be lost."
In a joint statement, the three broadcasters said: "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."