"In an industry where the costs of achieving scale are substantial, we consider the loss of plurality that arises from the proposed merger is likely to be significant and potentially irreplaceable," it said.
While it could not put a dollar figure on such "detriments", the commission said "that they are likely to be so fundamental to a well-functioning New Zealand society that they outweigh the organisational efficiencies achieved by the merger".
The two media companies made a joint statement to the New Zealand stock exchange this morning, saying the commission's concerns relating to plurality of media were "unquantified".
"The parties' view is that the [commission] has failed to properly take into account the diversity of opinions that will continue post-transaction in an increasingly converged digital world," the two companies said.
Both sides have the next fortnight to respond to the draft decision. The commission has also scheduled a conference next month where NZME and Fairfax can advance information in support of the tie up.
A final decision is due on or before March 15 next year.
A partner at law firm Simpson Grierson, Anne Callinan, said the draft decision raises questions about the extent to which the regulator can base its "decision on unquantifiable detriments to the public" and whether the commission had correctly assessed these.
"Obviously a draft determination that does not accept the authorisation is a significant setback, but it is not irreversible ... more often than not the commission has stuck to its draft determination, with one exception where it did change its mind from the draft decision and allowed the merger of two North Island ski fields," she said.
That case was the 2000 deal between Ruapehu Alpine Lifts and Turoa Ski Resort.
Commentators expressed mixed views on the draft decision today.
Media commentator Bill Ralston said he was surprised and called it "short-sighted".
"Frankly, it's getting harder and harder for traditional mainstream media companies to be able to survive and it would see to me that some form of merger is possibly the only way they would do it," Ralston said.
Journalists' union E tu, however, welcomed the draft decision, saying that its concerns were echoed by the commission.
That includes the issue of reduced competition, which E tu's members believe could drive down quality and reduce media diversity.
"Our members believe they made a strong case for rejecting this merger and now they
feel they've been heard," said the union's national media organiser Paul Tolich.
Shares in NZME fell 16c today, to close at 50c.
