Staying current with the latest gadgets is expensive. Every other week seems to mark the debut of a brighter TV or a faster phone. Consumers on the wrong end of the upgrade cycle are left with the malady known as technologus obsoletus, a lingering sensation of regret and envy. That’s why retailers including Office Depot (ODP) and RadioShack (RSH) in the last few years have started offering a service known as buyback insurance. The world’s largest electronics retailer, Best Buy (BBY), started its own program earlier this year. Although details differ, the insurance generally works like this: For an upfront fee, the retailer agrees to buy back an old device for up to half its original cost when a customer returns it within a few years.
Some technology addicts praise the convenience and sense of security provided by the service. Others feel like Jesse Loggins, a software engineer in the Denver area. “My first reaction was, they can’t be serious,” he says. “These are totally not worth the price.” Consumer advocates advise customers to stay away. “There are so many potential gotchas that a customer should be wearing protective gear anytime they sign up,” says Michael Shames, executive director of the Utility Consumers’ Action Network.
If the service is a good deal for anyone, it’s the retailers, according to analysts and industry insiders. “These programs can be very profitable,” says Jordan Kobert, a co-founder of the now defunct startup Ztail, which offered a similar program. TechForward, the Los Angeles startup that offers buyback insurance through Walmart.com (WMT) and other major retailers, disagrees. “We are giving people a solution that makes upgrading more affordable and environmentally friendly,” says Marc Lebovitz, the company’s chief operating officer. Sean Stephens, the senior director of Best Buy Services, says the insurance “appeals to people who see value in knowing what they’ll get back when they redeem their device.”
TechForward began offering the plans in 2006, though it didn’t sign its first big customer until 2008. Over the last two years, several large retailers, including Office Depot, RadioShack, and Dell (DELL) in addition to Walmart.com, have started offering TechForward’s plans. The startup won’t discuss revenues, but the model has enough appeal that Best Buy allegedly “stole TechForward’s trade secrets” to get its own program started, according to a lawsuit TechForward filed in February. Although neither company will discuss the ongoing litigation, the complaint alleges that Best Buy offered TechForward’s buyback insurance in a dozen Los Angeles-area stores as part of a pilot program begun in April 2010. In the fall, Best Buy ended the partnership. The company launched its own buyback service in January 2011 with a big marketing push, including its first-ever Super Bowl commercial.
The two programs work similarly. At Best Buy, shoppers can purchase buyback insurance on a smartphone for $60 or an HDTV for $180. If consumers return their gadget in good condition within two years (or four years for TVs), they get back some fraction of the original purchase price, which they can spend on an upgrade or another product. Those who return a phone within six months, for example, get 50 percent of the purchase price back. If they wait 18 months, it’s 20 percent. (Best Buy operates a separate trade-in program, and if the trade-in value of the device is more than what’s promised by the buyback plan, the retailer will pay the higher amount, plus 10 percent.)
Retailers like the plans in part because they offer customers peace of mind and thus encourage them to make purchases they might not otherwise complete. It’s also a high-margin business. Michael Pachter, a research analyst at Wedbush Securities, says buyback insurance is financially akin to a warranty, which is the most profitable item Best Buy sells. Best Buy’s services category, which includes warranties and buyback insurance, accounted for 6 percent of the company’s $10.9 billion in sales in the latest quarter but a full 11 percent of its $2.8 billion gross profit, according to Pachter’s estimates.
One reason for the high margins: A lot of buyers never make claims. One person with knowledge of the business model, though not the specifics of the Best Buy or TechForward programs, says that fewer than 10 percent of buyback customers return their products. The upfront fee in that case is pure profit. TechForward declines to disclose the percentage of customers who redeem their plans but notes that it e-mails reminders to its customers every six months. Best Buy says it also sends out reminder e-mails.
Even when people do turn in their old gadgets, there are lots of catches. The plans sold by Best Buy and TechForward’s retailers pay claims with gift cards instead of cash. At Best Buy, customers have to hang on to the original receipt and packaging or risk a delay in processing. And if the device has above-average wear-and-tear, the retailer will pay a reduced amount.
If the retailer pays the maximum, it still may be less than what the used device is worth. If a consumer had bought TechForward’s insurance for the 16 GB, Wi-Fi + 3G version of the first iPad when the tablet debuted in 2010, today’s buyback value would be at most $189. That same device is going for around $350 on EBay (EBAY).
Scott Mark, 29, knew all the rules when he visited a Best Buy near his home in Minneapolis in April. He still decided to get buyback insurance on his new EVO Shift 4G smartphone. The software account executive says he already has half a dozen old phones lying around the house, and that buyback insurance “makes it easier and less of a hassle” to upgrade. He recognizes that it’s a good deal for the retailer, too. “Because of this, I’ll make a point to go back to Best Buy for my next phone purchase,” he says.