Investigation into Alleged Misleading or Deceptive Direct Marketing by SmarTone Mobile Communications Limited

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CDN0222

Investigation into Alleged Misleading or Deceptive Direct Marketing email by SmarTone Mobile Communications Limited

Complaint against: SmarTone Mobile Communications Limited (“SmarTone”)

Issue: The sending of allegedly misleading or deceptive e-mails by a

SmarTone’s salesperson to customers of CSL Limited (“CSL”) about CSL’s network performance

Relevant Instruments: Section 7M of the Telecommunications Ordinance (Cap. 106)

(“the Ordinance”)

Case Opened: August 2008

Case Closed: October 2009

Decision: Breach of section 7M of the Ordinance

Outcome: Financial penalty imposed

Case Reference: T66/08

The Complaint

1. The Telecommunications Authority (the “Authority”) received an industry complaint concerning a salesperson of SmarTone, who had sent an email to a customer of CSL in June 2008 persuading him/her to switch to SmarTone. A copy of the email is reproduced in Annex 1.

2. The subject of the email was “Poor network performance of CSL 1010” and there were five main assertions:

(a) CSL 1010 would change their network infrastructure from NOKIA to ZTE Corporation (“ZTE”) very soon. The news allegedly appeared on a webpage (“webpage1”1) on 6 March 2008, a copy of the news article was

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reproduced in Annex 2;

(b) The change of network infrastructure would affect CSL 1010’s network performance;

(c) Changing the network infrastructure was just like a human to have a BIG surgery. SmarTone could foresee that there would be lots of impact on CSL 1010’s network both in terms of quality and stability;

(d) CSL 1010’s network was not as good as SmarTone’s especially in 3G network; and

(e) ZTE was not a famous company on network infrastructure, many customers were worrying about the technology level and skill set of it as well.

3. CSL alleged that the email contained a number of factual assertions which were incorrect and represented an unfounded attack on CSL and the integrity and capability of ZTE. CSL made the following four main allegations:

(a) The assertion that the change of network infrastructure would affect CSL’s network performance was made without evidence;

(b) The assertion that SmarTone could foresee there would be lots of impact on CSL’s network both in terms of quality and stability was made without substantiation. It was an allegorical exaggeration to liken the change of CSL’s network infrastructure to human undergoing a big surgery which amounted to a gross attempt to scare CSL’s customers into severing contractual ties with CSL;

(c) The assertion that SmarTone’s network was superior to CSL’s was made without foundation and no network performance criteria are particularised. It was contrary to evidence in relation to CSL’s 3G network; and

(d) The assertion that ZTE was not a famous company and that many customers were worrying was pure conjecture and was not founded on any evidence. CSL considered that ZTE had a distinguished and excellent reputation.

The Authority’s Investigation

4. Section 7M of the Telecommunications Ordinance (Cap 106) (the “Ordinance”) states that:

“A licensee shall not engage in conduct which, in the opinion of the Authority, is misleading or deceptive in providing or acquiring telecommunications networks, systems, installations, customer equipment or services including (but not limited

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to) promoting, marketing or advertising the network, system, installation, customer equipment or service.”

5. The Authority issued Guidelines on Misleading or Deceptive Conduct in Hong Kong Telecommunications Market (the “Guidelines”) in May 2003, which provides practical guidance on section 7M. Paragraphs 3.3 and 3.14 of the Guidelines provide that:

“3.3 When promoting, marketing or advertising telecommunications

products or services, licensees should always be able to substantiate any claims made – licensees should hold documentary evidence to prove claims, whether direct or implied, that are capable of objective substantiation.”

“3.14 The mere fact that a prediction does not come true is not without more, enough to make the prediction misleading or deceptive. However, when a licensee makes a prediction knowing it will prove to be false, or without caring whether it is true or false, the Authority may view such conduct as misleading or deceptive.”

6. In consideration of the statutory provision and the Guidelines, the Authority launched an investigation into whether the despatch of the alleged email by SmarTone constituted a breach of section 7M of the Ordinance.

7. The Authority requested SmarTone to provide details concerning the alleged email, in particular, objective substantiations to those assertions in the email. In addition, SmarTone was invited to make representation as to why it considered its conduct was not in breach of section 7M of the Ordinance, and to provide any further information that it might wish the Authority to take into account in deciding this complaint.

SmarTone’s representation

8. In its representation, SmarTone confirmed that:

(a) The email was sent by an Account Manager of SmarTone (the salesperson); and

(b) The salesperson, representing SmarTone, had sent the email to 3 potential customers in June 2008.

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infrastructure supplier by CSL was a piece of important news that the customers should know, as it would be an important and relevant consideration for making purchasing decision. Besides, the South China Morning Post reported the same news on 25 August 2008 that ZTE had got CSL mobile network contract. A copy of the news article is reproduced in Annex 3. Also, SmarTone produced two webpages (“webpage2”2 and “webpage3”3) publicizing the same news, copies of which are reproduced in Annexes 4 and 5. SmarTone submitted that in all these news reports, CSL and ZTE had either declined to comment or opted not to question the accuracy or truthfulness of the news. SmarTone opined that the fact that CSL and ZTE had remained silent did not necessarily mean that the news reported was untrue or inaccurate.

10. For the assertion that the change of network infrastructure would affect CSL’s network performance, SmarTone claimed that it was commonly recognized in the industry that the change of network infrastructure was associated with the potential risk of network failure. SmarTone produced two webpages (“webpage4”4 and “webpage5”5) of two companies providing specialized consultancy service in managing risks associated with network change to substantiate its view point. SmarTone, based on its knowledge and experience in the industry, believed that there would inevitably be certain risks when conducting a large-scale change of the network infrastructure of a live network.

11. Concerning the analogy of a big surgery to explain the potential risk and issues associated with substantial network change, SmarTone opined that it was a fair prediction based on common understanding and knowledge in the industry.

12. Regarding the assertion that CSL 1010’s network was not as good as SmarTone’s especially in 3G network, SmarTone submitted a benchmarking test report prepared by Wah Fung Telecommunication Engineering Co., Ltd. to substantiate its claim.

13. As for the assertion that ZTE was not a famous company and that many customers were worrying, SmarTone claimed that it was made with reference to the following:

(a) ZTE was not among the top tier telecom infrastructure equipment vendors in the global telecom market;

(b) No other mobile operator in Hong Kong had adopted ZTE before; 2 http://www.unstrung.com/document.asp?doc_id=147657 3 http://www.unstrung.com/blog.asp?blog_sectionid=414&doc_id=151569 4 http://www.networkmedia.com.hk/DataSheet/AlterPoint/AlterPoint_change.pdf 5 http://www.lumeta.com/change/

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(c) SmarTone, based on its past experience [ ]6, formed an opinion that ZTE infrastructure supplier’s products were inferior to those of some other more famous vendors [ ]7;

(d) [ ]8.

14. SmarTone believed that the statements made in the email were fair prediction based on general perception and common knowledge in the industry. SmarTone further alleged that the purpose of the email was to point out the potential risk of network change affecting the performance and stability of CSL’s network. Also, the existence of consultancy services specializing in network change risk management reflects the likelihood of network outage and interruption associated with network change.

15. In addition, SmarTone advised that it had not concluded any deal with the three relevant potential customers as a result of the email. Further, SmarTone had not received any complaint from these potential customers concerning the email.

CSL’s comments

16. Upon receipt of SmarTone’s submission, CSL was also invited to comment on SmarTone’s submission. CSL alleged that, in addition to the three corporate customers as claimed by SmarTome, another customer of CSL had been approached by SmarTone.

17. CSL also commented that, in SmarTone’s email, the unfounded speculative statements and the drawing of negative impressions about CSL’s network to their customers had been made without caring whether the statements are true or not and the statements constitute an inaccurate and misleading representation of the facts.

18. CSL considered that, without knowing the network roll out plans, SmarTone’s assertion about the potential risk of network failure is completely speculative and generalised.

19. Regarding the test report submitted by SmarTone to substantiate its claim that SmarTone’s network is better than CSL’s, CSL opined that the test results show SmarTone’s network is only marginally better than that of CSL.

20. As for the assertion concerning ZTE, CSL submitted that SmarTone’s comment

6 [ ] – commercially confidential information withheld 7

[ ] – commercially confidential information withheld 8 [ ] – commercially confidential information withheld

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is opinionated and made with a subjective view. CSL considered it inappropriate for SmarTone to comment on ZTE’s current technology by making reference to its previous negative experiences with a different generation of equipment.

The Authority’s Findings

21. According to the information provided by SmarTone and the other information available in hand, the Authority notes that the news posted in webpage1 was about CSL set to award a mobile network upgrade contract to ZTE, instead of to its long term partner, Nokia Siemens Network (NSN). No further details as to the scale, nature and timing of the network upgrade were given. The news first appeared in English on webpage2 on 5 March 2008, and then appeared in Chinese on webpage1 on 6 March 2008. Subsequently, in February 2009, CSL and ZTE announced that ZTE would upgrade CSL’s existing infrastructure with a fully integrated 2G/3G all-IP SDR-based network.9

22. The Authority sees a number of problems with the salesperson’s email. First, the email claimed that the change of network infrastructure would affect CSL’s network performance in terms of quality and stability, and liken the change to a human having a “big” surgery. The Authority is particularly concerned that such assertions were not made on the basis of any proof. Mobile network operators upgrade their mobile networks from time to time in order to catch up with the up-to-date technologies and to improve their services. Whilst it is recognised that network upgrade or change of the network infrastructure may entail potential risks, operators no doubt would take all possible measures to ensure that the upgrade or change do not adversely affect the normal operation of their networks. After all, it is the operators’ reputation which will be at stake if the upgrade or change is not carried out seamlessly. They simply cannot afford a dent in reputation and concede competitive edge to others in the highly competitive mobile market in Hong Kong.

23. For this reason, and based on the long-term experience of dealing with the mobile network operators in Hong Kong, the Authority considers that no mobile network operator in Hong Kong will implement a network upgrade or change of network infrastructure programme without thorough and careful prior planning. This will include planning of the migration from the existing to the new or upgraded network infrastructure, and optimal contingency planning to cater for all eventualities. This is the norm of how a Hong Kong mobile network operator would operate in circumstances of change or upgrade of mobile infrastructure. Therefore, for SmarTone to allege as a matter of natural

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consequence (as the tone of the statement suggests) that CSL’s purported change of

network infrastructure would have “lots of impact on their network both in terms of quality and stability”, SmarTone will need to show that such an allegation was made with substantiation. SmarTone did not mention either in the email or in its representation to the Authority that it was aware of whether CSL had any contingency plan for the upgrade and what the plan was. SmarTone did not produce evidence to show that the salesperson or SmarTone either knew when the purported change was going to take place, what the scale of the change was, or how CSL was going to tackle the issues that might surface during the changeover. The claim that the purported change of network infrastructure would affect CSL’s network performance was simply an exaggeration of the potential risk which would distort recipients’ perception. Such claim was not only speculative, but downright irresponsible and misleading. The analogy drawn between the change of network infrastructure and a human undergoing a big surgery is highly problematic as well.

24. The email went on to claim that the network quality of CSL was not as good as SmarTone’s, especially in 3G network. To support this claim, SmarTone submitted a benchmarking test report prepared by an engineering company. The test report measured attributes like service availability, accessibility, retainability and SMS delivery time performance of all the 2G and 3G networks. The data transmission rate of the 3G networks was also measured in the report. One of the problems with the salesperson’s claim about SmarTone’s network being superior to that of CSL was that, it did not specify the claim was based on a test report, in order to enable the recipients of the email to view the claim in context.

25. In addition, for those attributes analysed in the test report, the Authority notices that the result is not conclusive. SmarTone’s 3G network performed better than other 3G networks in some parameters while in some other parameters, other 3G networks performed better. The differences in performance between the networks of SmarTone and CSL were also not significant. The Authority also notices that several important parameters in analysing the quality of a network were not mentioned in the test report. Those parameters include network capacity, coverage and reliability. SmarTone, being an industry player, should be well aware of the limitations of the test study. Therefore, by relying on the test results that are arguably neither conclusive nor comprehensive to claim that SmarTone has a better network quality is problematic.

26. With regard to SmarTone’s assertion that ZTE is not a famous company on network infrastructure, SmarTone submitted that such assertion was made based on its own judgement and past experiences with ZTE. The reputation of an operator or equipment

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vendor is not a concern under section 7M investigation. Therefore the Authority does not hold any particular view on the reputation of ZTE and SmarTone’s past experience with ZTE. However, the Authority is concerned that the statement did not state that it was only SmarTone’s opinion. The statement instead asserted, among others, that “many customers are worrying about the technology level & skill set of ZTE”. SmarTone here was stating a fact, not its opinion. There is simply no evidence or information on which SmarTone relied to make such a claim.

27. As SmarTone’s representations show, the assertions made in the email about the changing of CSL’s network infrastructure simply relied on the news report on the webpage at Annex 2 but not other reliable or confirmed source. The Authority notes that the news report quoted a CSL spokesperson saying, “we haven’t announced anything yet” and “please note that we have a continuing relationship with NSN”. The news report also stated that NSN had declined to comment. Therefore, at the time, none of the concerned parties, namely CSL, ZTE and NSN, had confirmed the news in connection with CSL awarding a mobile network upgrade contract to ZTE, not to mention confirmation of the scale, nature and timing of the reported upgrade.

28. Yet the salesperson relied on this piece of news report to send emails to three potential customers claiming that “CSL 1010 is going to change their network

infrastructure from NOKIA to ZTE very soon”. It was a statement delivered in a highly

assertive tone. The reality was however that the salesperson was simply relying on a piece of unconfirmed news on the web, which did not even refer to the timing of the change. In addition, the news report only mentioned “network upgrade”, but the salesperson’s email referred to CSL changing its network infrastructure. This cannot be treated as a negligible inaccuracy. There could be a huge difference between a network upgrade and the change of network infrastructure, in terms of the scale of the task involved. SmarTone is an industry player, an insider. When the message was delivered in such an assertive tone, the potential customer receiving it would expect that SmarTone knew better than what was reported on the web about what was happening to CSL.

29. SmarTone argued that CSL and ZTE’s silence did not necessarily mean that the news was untrue or inaccurate. However, it neither follows that the news was true. Although CSL and ZTE subsequently confirmed the network upgrade in February 2009, at the time of sending the emails, SmarTone and the salesperson had not exercised any care to confirm the accuracy of the news posted in the webpage which in fact only conveyed unconfirmed information. What is plain is that SmarTone, through the salesperson, made a purported statement of fact about CSL solely based on a piece of unconfirmed news, and

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that purported statement of fact did not even accurately reflect what was reported in the news.

30. The Authority considers the overall impact of the email was that it conveyed a misleading picture as regards the purported change of CSL’s network infrastructure. The representations of SmarTone clearly demonstrate that the salesperson relied just on a piece of news appearing on the webpage and not confirmed by CSL, NSN or ZTE to make the assertions. Without knowing details of the extent of CSL’s “network upgrade”, SmarTone jumped to claim that CSL was “changing its network infrastructure”, and even drew an analogy between the change of network infrastructure and a human undergoing a big surgery. The Authority is also concerned that when SmarTone boasted about the superiority of its network over that of CSL, it failed to mention that the claim was based on a test report and the limitations of the test in order to enable the recipient of the email to view the claim in context. The statement on ZTE’s performance was equally problematic. SmarTone readily admitted that it was just an opinion that it held. This was however not the message that the statement conveyed.

The Authority’s Decision

31. For the reasons given above, the Authority is of the opinion that the despatch of the email constituted misleading or deceptive conduct on the part of SmarTone in breach of section 7M of the Ordinance.

The Authority’s Action – Financial Penalty

32. In considering the appropriate financial penalty in this case, the Authority has had regard to the Guidelines on the Imposition of Financial Penalty under Section 36C of

the Telecommunications Ordinance. Under the Guidelines, the Authority is to consider

the gravity of the breach, which includes the nature and seriousness of the infringement, whether any repetition of conduct is involved and whether there are any aggravating or mitigating factors. In this case, which is a second penalty occasion for SmarTone10, the maximum penalty stipulated by the Ordinance is $500,000.

33. In considering the gravity of the breach, and therefore the starting point for the level of penalty, the Authority notes first of all that the breach is a material one in the context of competition between mobile operators. Network performance is one of the key

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In December 2006, SmarTone was fined $100,000 for breach of section 7M of the Ordinance over a billboard advertisement promoting its roaming services (Case Ref: T66/06).

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considerations to the customer’s purchasing decision of mobile services. The email, by making a number of unfounded assertions, was intended to impress upon the recipients that CSL’s network performance would be adversely affected with an aim of persuading them to switch to SmarTone. The email was sent to corporate clients of CSL and these clients are distinctly more valuable than ordinary retail customers. Nonetheless, the Authority accepts that in this case, as emails were sent to a few corporate customers only, the overall impact the conduct had on the market was limited.

34. The Authority concludes that this was a substantial breach of section 7M in nature but with relatively limited impact on the customers. Having regard to the maximum applicable penalty of $500,000, the appropriate starting point for determining the level of financial penalty is $140,000.

35. While the breach is serious, in mitigation it is noted that the Authority has not received any customer complaints about the email, and no customer was actually induced into severing contractual ties with CSL.

36. The Authority has not been able to establish that there are any aggravating factors which offset the mitigating factors which have been taken into account.

37. Accordingly, the Authority is of the opinion that in this case of a second penalty for SmarTone, the penalty which is proportionate and reasonable in relation to the conduct concerned is $110,000.

Office of the Telecommunications Authority October 2009

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