The Commerce Commission has launched a probe into Sky Network Television's content contracts with internet service providers that may be hindering competition in New Zealand's pay-TV market.

The investigation was announced as the regulator approved Sky's Igloo venture with Television New Zealand, a low-cost pay-TV platform.

Sky's share prices has taken a dive on the news, falling 7.5 per cent or 41c to $5.04.

Chairman Mark Berry said its investigation into Igloo found potential difficulties new entrants face in winning a share of New Zealand's pay-TV market because of News Corp-controlled Sky's deals with ISPs.


"While this was not part of this investigation, we are aware of concerns that access to content and Sky's contracts with internet service providers may be hindering competition," Berry said in the statement.

"As a result, we have now opened a separate investigation under sections 27 and 36 of the Commerce Act."

Sky's content arrangements have come under greater scrutiny since the antitrust regulator launched an investigation into the drivers of broadband uptake after the Government stumped up $1.5 billion to build a national high-speed internet fibre network.

The antitrust regulator decided Sky and TVNZ's Igloo joint venture, which will offer user-pays and free-to-air content over Sky TV's spectrum and may be open to using ultra-fast broadband in the future, will make little difference to the level of competition in the pay-TV market.

"When we looked at two possible future scenarios, one with TVNZ's involvement in the joint venture, and one without, we found the level of competition was essentially unchanged," Berry said.

The deal puts relatively narrow restrictions on TVNZ relating to linear pay-TV via digital television, leaving scope for both broadcasters to compete for other pay-TV services including video on demand and pay-TV over the internet, Berry said.

"We also found that a number of other potential competitors may enter the market," he said.

ASX-listed Quickflix welcomed the probe, saying its own experiences in launching Quickflix have illustrated that "the issues raised by the commission are serious and real", managing director Paddy Buckley said in a statement.

"We will be sharing our information with the commission and assisting it with its investigation."

Quickflix used the regulator's investigation into demand-side drivers for broadband uptake to criticise Sky's content arrangements, saying they are a barrier to the uptake of streaming and on-demand video services. Its shares were unchanged at 12 Australian cents on the ASX.

Sky invested $12.75 million for its 51 per cent share in Igloo while TVNZ invested $12.25 million for the remaining 49 per cent. The platform is forecast to attract 7,000 subscribers at June 30, 2012 and 50,000 subscribers at June 30, 2013.

Sky CEO John Fellet called the Commission's approval of Igloo "a victory for innovation - and common sense".

The decision shows the Commerce Act regime is not there to give a leg-up to inefficient competitors, he said.

"The Commerce Commission, in dealing with the IGLOO complaints, in our opinion made a clear statement - if you want to win customers, do it like all NZ companies have to - by being innovative and bringing real choice to New Zealand consumers."

Fellet said he understood why the Commission wants to review the ISP agreement - "because of complaints from our competitors".

When Igloo launches in June, it will offer 11 pre-pay channels for $25 for 30 days viewing, plus pay-per-view options, he said.

TVNZ has been increasing its footprint in new commercial ventures having shed its charter for public broadcasting, but has insisted this latest tie-up with Sky won't dent its commitment to free-to-air digital platform, Freeview.

Last week, ASX-listed supplier of streaming and online movies Quickflix took a jab at Sky's content arrangements, saying they are a barrier to the uptake of video internet services.

Sky failed in its bid to have content excluded from the commission's review, which it had argued could become a quasi-regulatory inquiry if content arrangements were found to be a barrier to uptake.

Sky's shares fell 0.5 per cent to $5.45 in trading yesterday, and have gained 3.4 per cent this year.