Public broadcasting channel TVNZ 7 is to be wound up after just three years.

The commercial-free channel has cultivated a niche audience since its inception but Broadcasting Minister Jonathan Coleman confirmed yesterday its funding would not be extended beyond next year after it failed to live up to expectations that it would support itself over time.

The Government has already axed TVNZ's special charter funding and the eventual demise of TVNZ 7 means that funding for locally made television programmes will all become contestable through NZ on Air – meaning TVNZ will have to compete alongside commercial broadcasters including TV3, Prime and Sky.

TVNZ chief executive Rick Ellis said he was proud of the channel's achievements, but respected the Government's decision and was optimistic the channel's 20 to 30 employees would be redeployed within TVNZ. The station would stop broadcasting in June next year.

TVNZ 7 plays mostly local content, including Asia Downunder, Tagata Pasifika, Back Benches and Media 7.

Dr Coleman said Cabinet had looked at various options but keeping TVNZ 7 going would have required either a boost in public broadcasting funding or directing money away from programmes into infrastructure, at a cost of about $15 million a year.

That did not make sense given the changing face of broadcasting.

"When you look at how people are going to be watching their TV in the future, and you look at how kids are now assembling their content from everywhere – that is going to be the longterm future of how people are going to be watching TV. It seemed to make sense to us to make all the funding contestable. Then it doesn't matter if people are watching TV on their mobile phone, iPad or TV – they just want access to the actual content."

TVNZ 7s programme makers would be able to seek funding through NZ on Air so it was likely many TVNZ 7 programmes would continue, but would appear on other channels, Dr Coleman said.

That fit better with the direction broadcasting was taking.

He said we could be seeing the slow death of people being happy to watch a fixed roster of programmes on a traditional channel, at a set time, to a wide audience.

The Government has put public broadcasting under the spotlight since taking office in 2008, sparking fears over the future of both TVNZ 7 and Radio New Zealand.

The Government spends around $231 million a year on all forms of broadcasting including Maori Broadcasting, Radio New Zealand, community radio and television stations, Freeview and NZ on Air, which received about $81 million last year.

TVNZ got an extra $79m in 2006 for TVNZ 7 and TVNZ 6, which has since been set up as a commercial youth channel.

Dr Coleman said the Government had no plans to sell off TVNZ, and he believed Radio NZ was operating well.