Pinpricks & Big Sticks: An Anatomy of Telco & Tech Fines

7/12/2018

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Tearing through the brambles and thickets of regulated markets, the animals of the telecom and technology sectors are bound to pick up some wounds. Now and then, one springs a painful trap. More often than not, the fines and penalties into which they stumble are barely even an irritant.

Nowhere is this more apparent than in the £500,000 ($661,083) fine that Facebook was this week told it must pay. Charged with the not unserious crime of abusing customer data, the social networking giant has been lightly prodded with a laughable penalty by the UK's Information Commissioner's Office. At just 0.002% of the company's annual sales, the amount is roughly what Facebook makes every nine minutes. To paraphrase Paul Rainford, Light Reading's self-appointed Lord of Copy, fining Facebook £500,000 ($661,083) is like jabbing a toothpick into the backside of a bull elephant and expecting some reaction. (See Eurobites: Vodafone Greece Extends Network With CYTA Acquisition and Facebook: The Sick Man of Silicon Valley.)

Table 1: High-Profile Telco and Tech Fines Since 2017

Date	Company	Fine (millions)	Country/region	Fining authority	Reason
Mar-17	BT	£42	UK	Ofcom	Breaching contracts with telecom providers
Apr-17	Telefonica	€ 3	Spain	CNMC	Not complying with reference leased line offer
May-17	Facebook	€ 110	EU	European Commission	Lying about WhatsApp takeover
Jun-17	Google	€ 2,420	EU	European Commission	Unfairly prioritizing own comparison shopping service
Jun-17	ZTE	$892	USA	Department of Justice	Flogging gear in Iran and North Korea
Sep-17	Telia	$965	Various	Department of Justice, SEC, Dutch Public Prosecution Service	Dodgy transactions in Uzbekistan
Jan-18	Qualcomm	€ 997	EU	European Commission	Being abusive with LTE baseband chips
Apr-18	Altice	€ 124.5	EU	European Commission	Controlling PT Portugal before getting approval
May-18	Telefonica	€ 8.5	Spain	CNMC	Not doing what it was told in wholesale markets
Jun-18	ZTE	$1,400	USA	Department of Commerce	Lying after flogging gear in Iran and North Korea
Jul-18	Facebook	£0.5	UK	Information Commissioner's Office	Cambridge Analytica. Say no more
Source: regulators, companies, Light Reading.

The UK authority is seemingly trying to extract the maximum fine possible from Facebook for its Cambridge Analytica-related misdemeanors. But if penalties are supposed to make wrongdoers think twice, it hardly seems worth bothering with such a derisory fine. To look at this in another way, if an average UK household were fined 0.002% of its annual income, it would have to cough up 65 pence (about 86 cents). That's roughly the price of a Mars bar in a London supermarket (Light Reading is using UK price comparison data because your correspondent and copy editor have visited the US on just a few occasions, and usually on business trips when Mars bars and similar items were readily available only from overpriced hotel minibars).

While not as insignificant as Facebook's UK penalty, other fines issued by European authorities have been similarly pathetic in the last 18 months. Executives at BT Group plc (NYSE: BT; London: BTA), the UK's embattled incumbent, would not have been too disappointed with a £42 million ($56 million) fine they got for breaching contracts with other service providers. Amid an accounting scandal in Italy, the announcement of 13,000 job cuts and the loss of TV customers despite a spending splurge on content rights, that fine is the last of BT's problems. At less than 0.2% of turnover, it is the household equivalent of getting a parking ticket -- after your wife has put the kids up for adoption and started an affair with Luigi next door. (See Eurobites: BT 'Fesses Up to Compensation-Fiddling on Ethernet Services and BT's Next CEO: The Candidates.)

Table 2: How Much Do Fines Really Hurt?

Company	Fine (millions)	As percentage of sales in last fiscal year	Equivalent fine for average UK household	Fine classification
BT	£42	0.177%	£57.88	Parking ticket
Telefonica	€ 3	0.006%	£1.96	McDonald's happy meal
Facebook	€ 110	0.315%	£103.01	Kindle
Google	€ 2,420	2.544%	£831.89	4K TV
ZTE	$892	5.468%	£1,788.04	Week of Michelin star meals
Telia	$965	10.715%	£3,503.81	Family holiday of a lifetime
Qualcomm	€ 997	5.210%	£1,703.67	Two tickets to watch England lose to Croatia
Altice	€ 124.5	0.530%	£173.31	Babolat tennis racket
Telefonica	€ 8.5	0.016%	£5.23	Pint of beer
ZTE	$1,400	8.582%	£2,806.31	Functioning second-hand car
Facebook	£0.5	0.002%	£0.65	Mars bar
Source: regulators, companies, UK Office of National Statistics (ONS), Light Reading. Note: UK household data is based on average disposable income of £32,700 in 2017, according to the ONS; all underlying currency conversions are at today's rates.

Spain's telecom regulator has been even more limp-wristed, fining Telefónica the household equivalent of a pint of beer and a McDonald's happy meal for disobeying rules on two separate occasions since April 2017. And the European Commission (EC) has not always been much tougher. Facebook got a €110 million ($129 million) fine for lying about its WhatsApp takeover (that's like stopping our UK household from buying a new Kindle). Europe's debt-mired Altice was fined €125 million ($146 million) for taking control of a Portuguese operator before the EC said OK (there goes a new tennis racket for what's left of our UK family). (See Eurobites: Facebook Fined $122M for WhatsApp Fibs .)

Fines are a thorny topic, of course. Make them too punishing and customers might ultimately suffer. At their most extreme, they risk bringing a company to its very knees. Fined nearly 11% of its annual sales (from continuing operations) for corruption in Uzbekistan, Sweden's Telia Company is now quitting markets in central Asia and trying to boost profitability at its main European businesses. ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), the Chinese equipment vendor, has been fined nearly $2.3 billion (including money it has to place into "escrow") by US authorities since this time last year. That is nearly a fifth of what ZTE made in sales in 2017. (See Eurobites: Telia Coughs Up $965M to Exit Uzbek Nightmare.)

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Hardline US politicians have excitedly watched ZTE writhing in pain, and would happily see it perish. But while its survival remains at stake, the latest fine of $1.4 billion (including escrow) is part of a rescue package for ZTE, which has been stopped from buying US components since April. It is that measure, and not the recent fine, that has really imperiled ZTE. Indeed, the company had bounced quickly back from last year's fine of $892 million, equal to about 5.5% of ZTE's 2017 sales, and was growing fast when regulators struck. Nor did the 2017 fine put an end to wrongdoing, it seems. (See ZTE Nearly Back in Business After Inking US 'Escrow' Deal.)

All of that is bound to raise questions about the effectiveness of any monetary penalty. Even when authorities have dished out meatier fines, they have not stopped companies in their tracks. Although widely criticized in the industry, the ban on a sale of components to ZTE has some justification, given Chinese infringements, and at least demonstrates that other regulatory measures can have a bigger impact than fines. Coming up with solutions that do not jeopardize the broader market is the big challenge.

— Iain Morris, International Editor, Light Reading