European Union competition commissioner Neelie Kroes on Thursday told Germany that it needed to overhaul its funding system for state-owned channels ARD and ZDF. In a letter to the German government, Kroes demanded more clarification on how the public networks are funded.

"The Commission's preliminary view is that the current financing system is no longer in line with EU rules," the letter read.

The EU competition watchdogs were reacting to complaints lodged by commercial television networks in Germany in 2003 that their state-funded rivals used illegal subsidies. On Thursday, Kroes' department made it clear that it considered the funding of public television in Germany to amount to a sort of unlawful state subsidy which hampered free competition in several areas.

Apart from Germany, the EU investigation has also centered on Ireland and the Netherlands. On Thursday, Kroes dashed off similar letters to governments in Dublin and Amsterdam. Kroes has warned that the three EU member states needed to ensure transparency in the financing of their public television networks and make a clear distinction between their public activities and other commercial ventures such as the Internet and digital TV.

The commission insisted that it wasn't questioning the national right of the EU's 25 member states to set their own level of funding and public license fees as well as the objectives of their public broadcasters so long as they do not unfairly harm private sector competitors.

Online services under scrutiny too

The EU investigation is expected to have a far-reaching effect on public broadcasters' rights to offer online services. Among other things, Germany's commercial networks in 2003 charged that services for sale on the Web sites of state-owned channels make unfair use of public money.

Kroes (photo) too is believed to have serious misgivings about the use of license fees -- some €17 ($22.32) a month in Germany and collected by Germany's Central Office for Licensing Fees (GEZ) -- to fund Internet services, seeing it as an illegal cross-subsidy.

German public television networks ARD and ZDF, which were set up after the Second World War to ensure pluralism after the Nazi dictatorship, are now moving into sponsorship and offer a host of spin-off commercial activities on their Web sites.

The networks, controlled ultimately by Germany's 16 federal states, are now worried that the EU's intervention might severely curtail their online services. They are reported to point to these interventions as being directly contradictory to previous EU rulings upholding the right of Britain's public network BBC to go ahead with nine digital TV and radio channels or even ARD's special interest channels, Phoenix and Kinderkanal.

While Deutsche Welle is part of the ARD network, it is not funded by license fees but government money.

ARD and ZDF are now said to be looking at scaling down their Internet services as a precautionary measure and only provide Internet content relating to their programming schedules.

The BBC is also said to be worriedly watching Brussels' investigation of public networks in Germany, Ireland and the Netherlands. Top BBC executives are reportedly in talks with their counterparts at the German broadcasters as well as EU officials over what the case might mean for them.

Brussels wants independent monitor

Kroes on Thursday also demanded the setting up of an independent national authority that would monitor the upholding of transparency in the funding of public broadcasters. She pointed out that EU members France, Italy, Spain and Portugal had already bowed to similar EU demands in the past.

Germany, Ireland and the Netherlands will now have about four weeks to react to Brussels' letter. Kroes has already announced that Brussels will drop the investigation if the three countries take the necessary steps to get their funding of public networks in order.