KEY POINTS:
The Commerce Commission's 2006 approval for Sky Television to purchase free-to-air channel Prime gave it the power to dominate the broadcasting sector.
The free-to-air digital platform Freeview is partly an attempt to slow the Sky juggernaut but many believe it is too little, too late.
The purchase of Prime TV may be the best $30 million that Sky chief executive John Fellet has ever spent.
TV3 owners MediaWorks say New Zealand is unique in allowing a virtual pay TV monopoly to also own a free-to-air channel.
MediaWorks told the Ministry for Culture and Heritage's review of broadcasting regulation that Sky should be forced to sell Prime.
When the Prime purchase was considered by the Commerce Commission, MediaWorks offered dire predictions about the Sky threat.
But the Commerce Commission's jurisdiction is limited to local markets such as local programming and advertising where Prime has limited impact. And Sky ownership of Prime has its biggest potential impact in the international programming markets, and that is outside the Commerce Commission's jurisdiction.
That is because when Sky bids for programming rights it bids for all formats, including internet, television and even mobile phones, which it sells on to Vodafone.
As a virtual monopoly in pay TV and pay-per-view, Sky is in a powerful position to negotiate for free-to-air rights.
While subsidised New Zealand programming attracts big audiences for free-to-air television, the big margins are from foreign content from Hollywood studios like Disney and Fox.
As the fourth-ranked network Prime had been unable to challenge TVNZ or TV3 for free-to-air rights.
But when Sky bid for the free-to-air Disney rights, TVNZ said that added $50 million to the price it had to pay. TVNZ held on and kept the rights and you could argue that the increased price is just competition at work.
But Sky's pay channels can also cross-subsidise Prime. Sky does not break out the costs for Prime in its financial results. It is this sort of power that would typically be regulated or at least scrutinised in other markets, but not here.
Fellet insists he does not use pay TV to cover for Prime losses.
But its joint Sky and Prime win for the London Olympics are a sign of its increasing power.
Sky pulled back from the Disney rights deal more than two years ago.
With the Ministry of Culture and Heritage review opening the door to regulation, even if it is unlikely, Sky may have been pulled back from bidding for free-to-air rights for deals that would severely damage MediaWorks.
What is not clear in New Zealand's unregulated market is whether MediaWorks has changed its relationship with Sky to ensure its exit.
* John Drinnan is the Business Herald's media writer.
