British Satellite Firm’s Operations Hit a Snag : Communications: A key contract is terminated by miffed regulators.

The quasi-governmental agency that regulates the British TV industry announced Friday that it was terminating its contract with British Satellite Broadcasting, the company that merged two weeks ago with Rupert Murdoch’s Sky Television.

And, in a remarkably frosty tone, the Independent Broadcasting Authority also warned that regulators will soon have the power to prohibit the new British Sky Broadcasting from transmitting in Britain.

The salvo from the IBA, whose directors are still fuming over not being informed in advance about the merger talks, suggests there could be more trouble ahead for the new venture, dubbed BSkyB.

“It is clear to the IBA,” the agency’s statement said, “that the completion of the merger, for which the IBA’s consent was neither obtained nor sought, gave rise to a serious breach of BSB’s program contract.”

The IBA’s plan to void its 15-year contract with BSB means that the new BSkyB will be prevented from transmitting through the BSB’s advanced-format satellite. But the IBA said immediate termination “would not be in the interests of viewers of BSB’s services” and will allow it to continue until a transition is worked out.

The IBA had awarded BSB--controlled by a consortium of giant media companies--an exclusive franchise to transmit five TV channels. But before BSB could launch its service, Murdoch took to the air with Sky Television. Renting space on the medium-power Astra satellite, which is based in Luxembourg and transmits on the European-standard format, the media mogul began beaming four channels of programs to Britain. The two companies fought for domination, losing almost $20 million a week combined.

After three weeks of secret talks, the companies announced on Nov. 2 that they were merging.

The IBA contract termination will cause problems for BSkyB but nothing that appears insurmountable. BSB paid $300 million for its two advanced-technology satellites. The company will soon be in the odd position of owning them but not being allowed to transmit from them.

Whatever BSB suffers from losing its IBA contract, IBA’s suffering appears likely to be worse. The agency said it wants to continue providing television services after the termination of the BSB contract and will invite proposals.

But if well-funded BSB couldn’t become profitable, observers say, how could another company expect to make it--especially against the combined forces of Sky and BSB?

“There’s no way you could compete,” says communications analyst Graham Wilde of CIT Research in London.

That could leave the IBA with a high-tech satellite franchise to award and no one to take it.

At the same time, however, the TV regulators are gaining increased powers over non-domestic satellite companies. Under terms of Britain’s Broadcasting Act, which becomes law Jan. 1, the IBA will be transformed into a new regulatory body called the Independent Television Commission. The ITC already is operating in “shadow” form, watching over the shoulders of the outgoing IBA regulators. Among the transformed agency’s new powers will be the licensing of non-domestic satellite services.

ITC directors will be charged with finding that a satellite service owner is a “fit and proper” person to hold a license.

While it seems highly unlikely that the ITC would deny BSkyB a license, regulators appear ready to use the provision as a negotiating tool.

In its statement Friday, the IBA said: “BSB has informed the Shadow ITC of its intention that one or more companies in the merged BSB/Sky group should apply for one or more such licenses. The Shadow ITC will be giving careful consideration to the implications of such proposed applications.”

BSB shareholders issued a response saying they agreed with the IBA that immediate termination of the contract was not in the best interest of viewers. They vowed to seek a non-domestic satellite license from ITC as required by law.