- 1 -

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

1 http://www.cctime.com/html/2008-3-6/200836212991256.htm

- 2 -

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

- 3 -

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.

9. SmarTone alleged that the salesperson considered that the change of network

- 4 -

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/

- 5 -

(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

- 6 -

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

9 http://www.hkcsl.com/en/pdf/2009/GSMW_press_release_eng.pdf

- 7 -

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

- 8 -

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

- 9 -

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

10 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).

- 10 -

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

Annex 1

Annex 2

Annex 3

Annex 4

Annex 5