Sky said today it would take legal action against Ofcom after the media watchdog ruled it must offer its premium sports channels to rival broadcasters at a lower price.
Consumer groups said the broadcasting regulator's decision would mean more choice and lower prices for viewers, but sporting bodies reacted furiously to the potential cut in funding and threatened legal action of their own.
Ofcom's announcement that Sky must offer its Sky Sports 1 and 2 channels to other broadcasters at a wholesale price set by the regulator follows a three-year investigation into the industry after concerns were raised by BT, Virgin Media, TopUp TV and Setanta, which has since gone bust.
The regulator said: "Ofcom has concluded that Sky has market power in the wholesale provision of premium channels. Ofcom has also concluded that Sky exploits this market power by restricting the distribution of its premium channels to rival pay-TV providers. This prevents fair and effective competition, reduces consumer choice and holds back innovation and investment by Sky's rivals.
"Today's decisions are therefore designed to ensure fair and effective competition which should lead to greater investment, innovation and choice for consumers."
BSkyB immediately said it would challenge Ofcom's conclusions before the Competition Appeal Tribunal, describing the ruling as an "unprecedented and unwarranted intervention".
A spokesman said: "This is a marketplace where customers are well served with high levels of choice and innovation. Consumers will not benefit if regulators blunt incentives to invest and take risks.
"After three years of engagement with Ofcom, we now look forward to a judicial process which will apply impartial analysis and clear legal standards."
Ofcom has set a wholesale price of £10.63 per subscriber per month for each of Sky Sports 1 and 2 when sold on a stand-alone basis, 23.4% below the current wholesale price to cable operators.
Most consumers currently buy packages which include Sky Sports 1 and 2 and the wholesale price for this service bundle has been reduced by 10.5% to £17.14, Ofcom said.
The regulator had warned Sky, which holds the rights to many major sporting fixtures, that it wanted to wholesale its premium content out to rivals more freely.
But football's Premier League and cricket and rugby's governing bodies argued the move would "irreparably damage" investment in the sports.
Premier League chief executive Richard Scudamore said: "The Premier League is at one with the rest of UK sport over Ofcom's ill-judged and disproportionate intervention in the broadcast market.
"Their proposed action will strip out competition for sports rights and hugely reduce the incentives of all bidders, Sky included, to invest in sports rights. The effect will be to subsidise companies that have shown little appetite for investing in our content and fundamentally damage the investment models that have helped sport become a successful part of the UK economy and made sport so attractive to UK consumers.
"Of course we will be considering Ofcom's findings in full and do not rule out a challenge to protect the interests of fans, clubs and the wider game."
England and Wales Cricket Board (ECB) spokesman Steve Elworthy warned the ruling could have implications for the amount Sky would be willing to pay for sports rights - with a knock-on effect for funding for the game.
Mr Elworthy said: "Broadcast revenues are vital to the health of our game and allow us to fund cricket at all levels.
"A decision like this could lead to less investment in sport. It fails to consider the damage it could cause to sports from the grassroots upwards and that's our biggest concern."
Rugby Football Union (RFU) chief executive Francis Baron said: "The RFU is incredibly disappointed that its concerns, and those of all other affected sports rights holders, have not been taken into account by Ofcom, whose consultation process was inadequate and flawed.
"Ofcom set out to review pay-TV but, in doing so, have ended up interfering in the sports rights market where they have no competence nor experience and their intervention will remove competition from the sports rights market.
"We will review this very seriously indeed to decide what our actions may be. Clearly we will be taking appropriate legal advice on this matter."
The watchdog Consumer Focus said: "This has been a mammoth review by Ofcom and the regulator's determination to put the consumer first deserves much praise.
"Sky has transformed millions of viewers' experience of sport but there are also real concerns about whether it has now too much power in the pay-TV market and has inhibited the development of rival TV platforms.
"We welcome Ofcom's moves to ensure fair and effective competition, which we hope will lead to more choice, further innovation and lower prices."
BT said it hoped to have competitive deals on offer to customers before the new Premier League season begins in August.
Ofcom also ruled that Sky must offer wholesale high definition versions of Sky Sports 1 and 2 to rivals but stopped at setting a price. Sky has also been granted permission to launch Picnic, the service to bring pay TV channels to Freeview, which it put on hold two years ago, subject to the satellite company agreeing to the sports channels deal.