A row over TelstraClear's cable television network Saturn has provided ammunition for a growing fight about whether to regulate SkyTV.
The pay-TV giant that is in 50 per cent of New Zealand homes is under pressure to loosen its grip on the wholesale market for TV content.
Chief executive Allan Freeth said TelstraClear would test programming agreements with Sky for Saturn in the courts if Sky doesn't allow it to buy additional content elsewhere.
At present, Saturn's cable TV network in Wellington and Christchurch rebroadcasts much of Sky's content. But this limits its ability to use other content.
"I guess we might get tripped up one day when Sky will say 'you've broken your contract'," said Freeth.
He said Sky wanted to remain unregulated so that it could transfer a monopoly on satellite TV over to the internet.
Currently, talks are focused on Saturn.
But they are a prelude to the new ultra-fast broadband (UFB) network and internet TV.
Allan Freeth said UFB would be driven by content and in particular video and games.
He said Sky's dominance of wholesale programming and the absence of regulation would lead to a "bottleneck" for new services.
Lack of competition could limit the amount of unique content available and the demand for new internet TV channels.
It could slow uptake of UFB and lead to more piracy.
Freeth said Sky wanted to retain a role as a gatekeeper for new video and entertainment services on UFB.
New Zealand was unique in leaving the market for television unregulated at a time of increased convergence for television and telecommunications.
Sky chief executive John Fellet dismissed Freeth's concerns about Sky's growing dominance.
He said the internet would make life harder for Sky, not easier.
US-based IPTV services like Apple TV and Netflix might access UFB that would mean more pressure on Sky.
He rejected Freeth's claims that uptake on UFB would be built around content such as video and games.
Freeth said he was looking ahead to the new era of internet TV once UFB is up-and running but could not wait for the Government to deal with the problems from an unregulated market.
"We can't stop. We have made made it clear to Sky that unless we can come to some sort of arrangement we will be doing stuff that they disagree with - and maybe that has to be sorted out in the courts," he said.
"Sky's view is that it will provide any content you want. But I'd much prefer Sky competes with other players."
TelstraClear has run a campaign against government oversight of telecommunications including a 10-year regulatory holiday for UFB.
Freeth said once that was completed, TelstraClear intended to focus on the absence of content regulation.
"We have not suggested any big regulatory intervention. What we have suggested is some light-handed information reporting that would immediately reveal the depth and problem of the issue," he said.
He said negotiations had been more productive than in the past 10-year period because Sky was concerned about the threat of regulation.
"Sky has been able to keep everyone on a very level playing field - it has been the guy controlling it."
A source familiar with the situation said that Sky faced a danger from telcos using a Commerce Commission study on barriers to UFB for leverage. The study could turn into a full-scale review of content and Sky's role, the source said.