BT's Response to Ofcom's consultation document Automatic Renewable Contract
1.1 We believe ARCs are good for BT’s customers, as evidenced by the large numbers who have made the positive decision to choose our auto-renewable deals. We are pleased that Ofcom has recognised that there is no lack of transparency surrounding ARC terms or too much complexity in the opt-out process, as we have gone out of our way to ensure that the terms and conditions and the opt-out process are as clear as possible. If Ofcom goes ahead with its proposals to prohibit ARCs, large numbers of customers will miss out on the convenience of being able to continue on an attractive, discounted deal without having to do anything. We do not believe there is any justification for taking this step from a consumer protection perspective.
1.2 We do not agree with Ofcom’s analysis of the economic effects of ARCs and the potential harm they could cause to competition. Ofcom’s portrayal of a direct and unambiguous link between reductions in switching levels and harm to the competitive process is mistaken, and there is no empirical evidence of any reduction in competition or increased prices in the consumer fixed voice and broadband markets since BT introduced ARCs in 2008 – in fact, the reverse is true.
1.3 Many of the alleged problems that Ofcom associates with ARCs are, in fact, issues that could also be raised about minimum term contracts in general. Ofcom’s interpretation of their consultant’s analysis overestimates the impact of ARCs on switching. A richer specification of the model which separates out the effect of ARCs from ETCs after the first minimum contract period shows that ARCs would reduce switching by just 14.7%, and it could be even lower if the price effect were accounted for more appropriately, as in the consultants’ supplementary report published subsequently. We think it is highly questionable whether effects of this magnitude constitute a material difference in switching levels in the market, let alone proof of harm to the competitive process.
1.4 We are very concerned about the extension of the prohibition to contracts with small businesses. We have not discussed with Ofcom the nature of our business contracts, and we do not believe that our current ARCs for small businesses – for calls and lines discount packages – are caught by the definition in the consultation, nor that they should be of concern to Ofcom for a number of reasons. Ofcom has provided no evidence or justification in support of a prohibition on ARCs for small businesses, and the Universal Service Directive gives Ofcom discretion not to apply any regulatory intervention to these contracts.
1.5 In practice it is almost impossible for BT to distinguish between customers with more or less than ten employees, and therefore if Ofcom does not agree that our current business ARCs are unaffected, a prohibition could result in BT having to withdraw discount packages from a large number of corporate customers, all of whom we believe to be very happy with their current arrangements. This would not be proportionate or objectively justified.
1.6 If Ofcom is not persuaded to think again about these proposals, we would need to discuss the timing of ARCs withdrawal, as (due to the timing of our scheduled systems releases) it would not be possible simply to stop selling ARCs immediately from the date of Ofcom’s final decision, and nor would it be possible to start moving existing customers off ARCs immediately from this date. Ofcom has underestimated the complexity of the work required.
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