The harms caused by ARCs – Ofcom Report

Ofcom’s concerns regarding the potential impacts of ARCs are dealt in detail in their reports. In its consultation, Ofcom used this analysis to express its concern about the ARCs and to interpret its evidence and how it helped the regulator to choose the right policy. Here, the analysis presented in the consultation and the views of respondents are discussed.

The responses provided by BT and Sky were kept separate since they criticized many aspects of the regulator’s analysis. It included a number of general comments which were against individual consultation questions. All other responses to consultation questions were discussed.

This also deals with the potential costs and benefits of ARCs for consumers. It also discusses Ofcom’s concern on the ARCs potential to increase switching costs in the form of ETCs. Ofcom noted that the switching costs have two effects on consumers. One is that the consumer is prevented from going for a better offer available in the communications market. Secondly the switching cost acts as a detriment to competition among the firms.

Ofcom admits that some consumers are benefited by ARCs as the contracts will be renewed automatically. Any way these benefits are very limited. It also deals with the benefits of ARCs and cautions the regulator about certain risks. Since ARCs are beneficial to certain group of consumers, Ofcom has to be very careful in framing laws with regard to ARCs. Ofcom has to conduct a detailed assessment regarding the benefits of ARCs before making any regulations otherwise it will become a failure.

Ofcom noted that ARCs are concerned only with the renewal of the contract. The consumer is not bound by any extra contractual obligation. Hence Ofcom has to consider separately the benefits arising out of MCP with out connecting it to the benefits arising from the ARC term itself.

In the communications sector MCPs (Minimum Contract Period) is common. Here the consumer can spread out the up-front cost over a period of time. The length of the MCP is the deciding factor for determining the size of benefit that the customer gets. If the contract period is long, then the price discount will be great. Since ARC terms are not increasing the contractual period, the benefit arising from it cannot be attributed to it.

Ofcom noted that ARCs create savings because renewal process is done automatically. No staff involvement is necessary. What is saved here can be passed on to the customers by way of a lower monthly price. Last but not least ARCs are convenient to some consumers. Those who wish to continue the contract could do so with out any involvement.

Ofcom discussed the reasons why it considered the benefits of convenience is limited. Suppose there are no ARCs, then the CPs would have been approaching the consumers with many incentives for an opt-in option. A consumer who is completely satisfied with the service of the CP may be willing to sign up a longer MCP. Any way the ARCs prevent the customers from entering into a longer contract. Both the cost of forgetting to opt out of an ARC and the cost of forgetting to renew an MCP are equal. At the same time the failure to opt in is not as great in residential communications as the contract becomes a month by month relationship. Again the failure to opt in to a new contract can be solved by entering into a new MCP at the same time failure to opt out will result in a new MCP and ETC.