The merger Vodafone NZ and Sky TV were seeking would likely have gone ahead had it not been for Sky's premium sport content, the Commerce Commission said after declining the proposal today.
About half of all households in New Zealand had Sky TV and a large number of those were Sky Sport customers, Commission chair Dr Mark Berry said.
"Given the merged entity's ability to leverage its premium live sports content, we cannot rule out the real chance that demand for its offers would attract a large number of non-Vodafone customers.
"The central question that we considered in this case was whether the merged entity would be able to leverage Sky's premium sports content to such an extent that over time it would reduce competition in the telecommunications markets, being broadband and mobile," he said.
"There is, as you would expect, a very significant consumer segment for whom Sky Sport is a must-have."
He added: "Sky Sport has all the important content that is the glue to which New Zealanders are attached -- rugby, cricket and so on."
To clear the merger, the Commission would need to have been satisfied that it was unlikely to substantially lessen competition in any of the relevant markets, Berry said.
"The evidence before us suggests that the potential popularity of the merged entity's offers could result in competitors losing or failing to achieve scale to the point that they would reduce investment or innovation in broadband and mobile markets in the future.
"In particular, we have concerns that this could impact the competitiveness of key third players in these markets such as 2degrees and Vocus."
This was also against a backdrop of fibre being rolled out, making it an opportune time for the merged entity to entice consumers with new offers, Berry said.
"If significant switching occurred, the merged entity could, in time, have the ability to price less advantageously than without the merger or to reduce the quality of its service."
In a press conference following the decision, Berry said that 65 submissions were made on the proposed merger - the most that the Commission had ever received on a proposed merger.
He acknowledged that the deal could have produced competition in the short term, but in the long term, "our concern is that rivals might not be able to match the merged entity's offers".
Sky TV chief executive John Fellet said in a statement to the NZX that the Commission's decision was disappointing.
"This is a very disappointing conclusion to a merger we saw as enhancing New Zealand's communications and media landscape. From here we will continue to strive to deliver innovative ways to curate and deliver entertainment to all of New Zealand."
Vodafone New Zealand chief executive Russell Stanners said in a statement that the company would carefully review the Commission's decision and consider all courses of action.
"We are disappointed the Commerce Commission was unable to see the numerous benefits this merger brings to New Zealanders," he said.
Spark regulatory affairs general manager John Wesley-Smith said the Commission's decision was a big positive for Kiwi consumers.
"The lack of modern on-demand options for how New Zealand sports fans can access 'must-watch' premium sports content today, which would have been exacerbated by the merger, meant the merger was not in the best interests of consumers and so we believe the decision to decline was the right one."
Spark and several other telcos would welcome the opportunity to bundle on-demand versions of Sky's sports content with their mobile and broadband services.
Business and technology commentator Paul Spain said Sky had the most to lose as a result of the Commission's decision as the company seeks to shore-up its dwindling customer base.
He suspected Sky would consider becoming an internet service provider or telco in its own right.
"Whether they would establish that directly or whether they would be looking at an acquisition such as 2Degrees," he said, adding that such an acquisition would likely not face such a strong backlash given 2Degrees' smaller market share compared with Vodafone's dominance.
At the very least, he said Sky needed to move away from its traditional set-top box focus and move to a fully digitised operation that would allow customers to access its content through an app.
"It's a pretty messy offering I would say from Sky at the moment," he said.
Sky would also need to bring down its pricing, Spain said.