Television New Zealand said yesterday it would be taking 49 per cent of a new pay TV platform tentatively called Igloo - with Sky holding the majority 51 per cent.
The dominant players in the free-to-air and pay television market have formed an alliance that shuts out competition.
The new lower cost pay network is a blow to TV3 owner MediaWorks and to Freeview.
The alliance between the state broadcaster and a pay TV company marks a major strategic shift in New Zealand media that will test New Zealand competition law.
The Government has steadfastly refused to consider regulation of Sky which is now a business partner of a state enterprise.
The new network will use digital terrestrial frequencies owned by Sky and picked up on a standard digital aerial.
It will deliver around 12 pay channels to a set top box, being developed by Sky, which will include a Freeview tuner.
It will cost about $25 a month and with uptake slowing for the full Sky package, the cheaper offer will likely help Sky to revive growth.
Sky chief executive John Fellet said the new service would start in mid 2012 - in time for the start of the switch-off for analogue signals.
Programming would be finalised next week, with the Discovery channel expected to be among the options. It is highly unlikely to include sport.
The deal was predicted by the Business Herald last week.
Telecom has also been in talks, but it is understood it wanted to have exclusive rights to retail the system.
A similar arrangement with TVNZ with TiVo turned sour, and Sky rejected that offer.
As Sky uptake slows, the new network aims to pick up people who do not want a full package and may allow it to avoid competition issues if it fully owned Igloo.
It will be a strategic, low earning asset.
For TVNZ - which recently lost its public broadcasting responsibilities - it allows access to the pay TV market without challenging Sky.
The timing of the announcement so close to the election is significant because it avoids debate.
The Government would have been aware of the move that changes the shape of the industry, but made no mention of it in its recently released broadcasting policy.
TVNZ refused to confirm the move last week.
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