ShowMeTV will start within months, positioning Telecom - which is changing its name to Spark - as a rival to Sky TV, Television New Zealand and MediaWorks.
The plan is modelled on US-based Netflix, which has changed the way people around the world watch TV. Netflix has 44 million members in 40 countries.
But analysts say Telecom's chances of success in breaking into the internet television market hinge on whether it can secure high-quality programmes, such as HBO's Game of Thrones and AMC's Breaking Bad, for which viewers will be willing to pay.
Netflix has grabbed the limelight in America this year with the hit show House of Cards, starring Kevin Spacey and Robin Wright, which starts tomorrow night on TV3.
Telecom said it would spend $20 million on the service in its next financial year, which begins on July 1, and roughly $15 million of that would be spent on buying shows.
Chief executive Simon Moutter said: "It's primarily television content initially, and we'll expand it from there."
International rugby appears likely to stay with Sky TV for the moment - Mr Moutter said he didn't expect live sport to be part of ShowMeTV's "early proposition".
Netflix isn't legitimately available in New Zealand, and a service that is available, Quickflix, has been criticised for a lack of quality content.
Mr Moutter would not reveal who Telecom was talking to about supplying its programmes. "We're ruling nothing out, we're open to all content providers."
Sky TV chief executive John Fellet shrugged off Telecom's plan, saying subscription video-on-demand services such as Netflix complemented pay-TV businesses like Sky TV, rather than taking customers away.
"Netflix, I think, has 40 million subscribers in the US and the US hasn't lost any pay-TV subscribers," he said. "And 80 per cent of all the Netflix subscribers in the UK also take [pay-TV service] BSkyB."
A market analyst with sharebroker Forsyth Barr, Blair Galpin, questioned whether the $20 million Telecom planned to spend in the next financial year would buy the quality content it needed to be successful.
Internet TV was becoming a "busy space" in New Zealand, he said, and TVNZ and TV3 owner MediaWorks had their own services available.
"It will come down to who has the best-quality content," Mr Galpin said.
Ultra-fast broadband has been made available to almost 20,000 homes and businesses.
A TVNZ spokeswoman would not be drawn on the specifics of possibly supplying its content to ShowMeTV.
"But as a general principle, we'd always be interested in looking atopportunities that could bring us a benefit," she said.
Telecommunications Users Association chief executive Paul Brislen said Telecom's plan was an "ideal move".
"Nobody is offering a serious content play - it's a little bit here and a little bit there," he said.
"We've got Quickflix but they're a bit stuck because the big boys [studios] don't want to play with them. So hopefully Telecom can have a go at it and provide legal content for New Zealanders."
Asked how Telecom could avoid the difficulties faced by Sydney-based Quickflix, Mr Moutter said: "We have a distribution capability and a marketing capability that is vastly superior to Quickflix and we'll be resourcing the quality of that content library to a level substantially superior."
Technology expert Lance Wiggs said Telecom's decision not to provide the service through a set-top box was a bad move.
"The idea of not having a set-top box is putting a lot of faith and trust in the ability of TV vendors to make it really simple for you to use their TV to find content on the internet," he said.
Telecom was up against a wide range of internet TV competitors, some of which - such as TVNZ On Demand - were free.
"There doesn't seem to be any compelling reason why I would choose Telecom to provide me with content, and $20 million doesn't give you a lot of content either."
Meet the big role model
"We're intending to launch ShowMeTV - a Netflix for New Zealand." - Telecom chief executive Simon Moutter.
• Netflix is a US on-demand internet streaming provider with a catalogue of television shows and movies.
• It has more than 33 million users in North and South America, the Caribbean, and parts of Europe.
• It also produces its own shows, notably House of Cards and Arrested Development.
• Users pay a monthly subscription for unlimited access to Netflix's collections, which can be watched on computers, smartphones and tablets and through gaming consoles.
