Leading streaming sites like Youku, iQiyi and Tencent Video have all announced the termination of their third-party video services in set-top boxes in response to the new restriction.

China's Internet TV market was expected to reach $1.38 billion in 2016, according to a study by the consultancy Digital TV Research.

"But (the restriction) will have a huge impact on the streaming sites," says Pang Yiming, an analyst with the Beijing-based consultancy Analysys International.

"All they've been working on has been overturned."

Many have speculated one reason for the move is to protect traditional TV channels.

But a more conspicuous motivation is that it'll enable the administration to more closely monitor content.

In June, the regulator warned seven Internet TV license holders that it might revoke their licenses because they allowed unapproved access to streaming sites to provide content it found either obscene or detrimental to political stability.

But the regulator obviously doesn't want to kill the streaming sites.

It hopes to establish clear rules and have the ultimate say over content sources so it can draft the Internet TV industry's developmental blueprint, says Wu Chunyong, a veteran industry analyst and editor-in-chief of IT portal Dwrh.net.

"The only way out for streaming sites now is to play by the rules and work with content providers," he says.