RUPERT AND James Murdoch might not have been entirely surprised by the pounding they took from the Competition Commission last week, but it is hard to think of a time when they have been in more of a regulatory tangle.

The father and son team face the prospect of selling the 18% stake in ITV that they bought through BSkyB last year after the commission provisionally ruled that the move was anti-competitive.

To add to this setback, Team Murdoch also found itself in the peculiar situation of launching a service that might never be. No sooner had Sky last week unveiled Picnic, its planned pay-TV service for Freeview, than television regulator Ofcom announced it would investigate its effect on the market.

This is over and above a wider pay-TV inquiry that the regulator announced earlier this year, which might see Sky referred to the Competition Commission and even possibly broken up. With Ofcom's investigations tipped to come out at least as badly as the commission's conclusions on Sky/ITV, the quangos are turning the screws on the Murdochs like never before. Some mutter darkly that this could yet be the point at which Sky's power in UK television reached its peak.

The commission's reasoning in its Sky/ITV finding was that Sky could end up having disproportionate power in special votes requiring 75% backing from shareholders, such as for major investment decisions.

Its rationale is that the attractiveness of pay-TV to the man and woman in the street is inextricably linked to the quality of what is available on the free channels. The commission fears that this conflict of interest would give Sky an incentive to vote against major ITV investments or acquisitions, rejecting previous arguments from Sky that this was "fanciful".

The commission will not send its final conclusions to the government until early January, after which it will be for business secretary John Hutton to decide what action is required. But that didn't stop the commission from laying out some options, ranging from imposing conditions on Sky's stakeholding, such as not intervening on big decisions, to diluting or even completely selling its shares.

The decision goes to the heart of the future of UK television. Although Sky has always insisted it was merely making an investment to take advantage of ITV's weak share price, most observers believe it bought the stake to block rivals from buying the broadcaster last autumn.

At a time when the company was limping along with no chief executive amid one of its worst ever advertising and ratings performances, Channel Five owner RTL was being tipped as a suitor, then NTL (since rebranded as Virgin Media) put in a £5 billion bid.

Sky's move, lauded by many as a masterstroke, was most likely a do-or-die move to ensure it would be at the centre of any future round of TV consolidation. Virgin Media's chances of making a second tilt at ITV have been severely reduced by its own troubles and the wider credit crisis, but Sky still now faces being on the wrong side of a line drawn in the sand that could limit its scope for future manoeuvres.

If that is clearly no picnic, the other question is what will become of Sky's proposed service of the same name. Across four channels it wants to offer Sky Sports 1, Sky Movies, Sky News and Sky One, with different parts of the day devoted to new factual and children's segments. Possibly bundled together with Sky Broadband and fixed-line telephony, this is tipped to be made available for between £20 and £25 per month.

This would be a new cheaper tier than the cheapest satellite package (priced at £26), targeting consumers who cannot erect satellite dishes or do not want a vast range of channels. This is the so-called mid-market, halfway between Freeview and premium satellite customers. Apparently numbering six million households, they are also the main focus for Virgin.

In keeping with Sky's successful move into broadband and fixed-line telephony over the past couple of years, Picnic will be seen as a further admission that the days of great growth from premium pay-TV have come and gone.

Whether this route is open to the Murdochs is another matter. The company sparked outrage among rivals earlier in the year when it emerged that it wanted to withdraw Sky News, Sky Sports News and Sky Three from Freeview and replace them with a mini-pay-TV platform.

BT, Setanta, Virgin Media and Top Up TV, who had all been squeezed by Sky in different ways in the preceding months, wrote to Ofcom saying it was time Sky was broken up.

Ofcom responded by announcing a full investigation into the pay-TV market, focusing on things like whether it is fair for Sky to pick and choose which rivals to sell channels to and at what price, rather than offering a transparent set of prices available to all.

Not content with this, last week Ofcom announced a separate investigation into Picnic. Given the threat to rival Freeview pay-TV providers Setanta and Top Up TV, it has decided to look at whether Picnic should be fully permitted, permitted with conditions or banned. We are now in the scarcely believable situation that Sky faces two investigations by a regulator run by Ed Richards, a former adviser to Tony Blair, who was renowned for wooing Murdoch.

David Mercer, principal analyst at Strategy Analytics, says that the pressure is the result of the bullish approach of James Murdoch, Sky's chief executive for the past couple of years. While Murdoch the younger can take much credit for transforming Sky into a communications provider, Mercer says: "Since James Murdoch has been there, he's been pushing people to the limit to see far he can go.

"He's been very deliberate about it. He has set his stall out from the beginning, saying our job is to grow this business."

The question is what can Sky expect to happen next. The fate of Sky will be particularly close to Rupert Murdoch's heart, since he's known to have gambled the future of the entire News Corporation empire on the success of the satellite broadcaster when in launched in 1989.

Some observers, such as Guy Bisson, head of television at research company Screen Digest, argue that the Picnic service should be permitted.

He says: "The regulators will have less of a strong case to refuse the Picnic proposal than they did with the ITV stake. While Sky's ITV move saw it crossing over from the pay-TV market to free-TV, here it is simply extending the reach of its pay-TV offer.

"There are also already a number of players competing in pay-TV on Freeview, such as Top Up TV and Setanta, so it is hard to see how Ofcom can justify making a distinction with Sky."

Omar Sheikh, an analyst at Dresdner Kleinwort Benson, disagrees. "The impact of Sky Sports on Setanta alone will mean that Ofcom is unlikely to allow it," he says.

Moreover, he believes that Ofcom will use the wider pay-TV review to refer Sky to the Competition Commission for a full going over, which would likely complete in 2009. The worst possible outcome for the satellite company would be that it would be split into two businesses: one that owns the channels and another that owns the channel platforms. Sheikh put out a research note several months ago saying this outcome was foreseeable, recommending a "sell" on Sky shares; he has not changed his view.

Despite his arguments, Bisson is not convinced that Picnic will survive, and thinks the ITV stake will go the same way. But he cannot see a full break-up taking place.

"What would you have to say about Virgin? It owns Flextech which makes channels Living TV and Bravo and it has just launched Virgin 1," he points out. "I don't see how you can say one is different from the other."

Either way, Sky is facing a regulatory white-knuckle ride over the next few months. It will have more sense of where the wider pay-TV investigation is going after Ofcom unveils its consultation proposals later in the autumn, after which the next crunch date will be the commission's final conclusions on Sky/ITV early next year.

If the commission follows last week's findings and proposes a part or full sell-off, the big question will be whether John Hutton will take such steps on the government's behalf. If Gordon Brown needed another reason to get an early general election out of the way, ahead of a possible nasty confrontation with the Murdochs, he need look no further.