Technology

Used Cell Phone, Anyone?


Apple is just the latest in a growing number of companies warming to the idea of selling refurbished mobile phones in the U.S.

Haven't yet purchased a $599 iPhone? You're in luck. You can now buy the gadget directly from Apple for $100 less—that is, if you don't mind getting used goods.

Apple (AAPL) on Aug. 19 began selling refurbished versions of the music-playing mobile phone, which originally hit store shelves June 29. The consumer electronics maker joins a small but growing number of mobile-phone suppliers that are certifying, providing warranty support for, and selling used handsets in the U.S.

Growing Business

While Apple already sells refurbished Macintosh computers and iPod music players in the U.S., cell-phone makers and wireless carriers in general have been reluctant to offer used goods in this country. Until recently, used phone collectors have mainly shipped those goods to refurbishers overseas.

It's difficult to say exactly how many refurbished phones are sold in the U.S., but even a number in the low millions would be small, compared with the 143 million mobile phones sold last year in the U.S. Still, the numbers are rising fast. CollectiveGood, which collects and forwards some 150,000 phones to refurbishers each year, reports that two-thirds of the devices return to the U.S., while the rest go to less developed countries. A year ago, the opposite was true. "That's a very major shift," says Seth Heine, chief executive of CollectiveGood, which also operates RIPMobile.com. To meet rising demand, the company has launched a new site, GreenPhone.com, offering as much as $300 in cash for high-end models for the U.S. market.

Cell-phone refurbisher Cellucom Group, based in Hilliard, Ohio, says its monthly production doubled in the past year, to 100,000 phones a month. The company, which sells its wares in the U.S., employs 140 technicians in Ohio, but plans to more than double its staff there to 300 people by 2010, says Charlie Taylor, director of carrier relations at Cellucom. It's also about to open another plant, where used phones are repaired and tested, in North Dakota.

Price Point

The companies are responding to growing demand from U.S. carriers big and small. The country's largest wireless service provider, AT&T (T), prominently features a refurbished phones section on its Web site, and sells 71 models, including Research In Motion's (RIMM) popular BlackBerry Pearl and the Samsung BlackJack music phone, that have been revamped. The company won't say how many refurbished phones it sells.

Virgin Mobile USA and more than a dozen other carriers that resell wireless services from AT&T, Verizon Wireless, and Sprint Nextel (S) currently offer refurbished handsets to customers. Smaller rural wireless service providers are jumping on the used phones bandwagon. And insurance companies increasingly buy refurbished phones to offer to consumers who lose or damage insured handsets.

What's driving the demand? It's due in part to an increase in the prices for new phones. In the past several years, mobile phones' capabilities have expanded to include cameras, music players, and e-mail access. At the same time, their average selling prices jumped to $72 recently, according to Ross Rubin, an analyst at consultancy NPD Group. A few years ago, that price hovered around $50. Refurbished phones offer a way for carriers to placate users who can't afford pricier models.

Legislative Boost

Refurbished phones also present a way for carriers to get more consumers signed up for expensive data plans. They may offer consumers high-end devices at prices that are 10% to 50% lower than those for new models; but these models, such as the BlackBerrys and the iPhone, still require the same expensive service plans to function. (AT&T says it doesn't plan to sell refurbished iPhones.)

But the biggest market for refurbished phones is prepaid phone service. Take Telispire, which provides wireless services through other carriers' networks. The company can't afford to subsidize new phones for customers who may buy 200 minutes of its service and never come back. "Due to shrinking margins, we have to utilize refurbished models," says David Cook, sales and marketing manager at Telispire, which offers refurbished Motorola Razr V3c and Sanyo SCP-8100 models, among others. Thanks to low-cost refurbs, $99 gets a customer 200 calling minutes and a phone. "The demand is insatiable—that's not an issue," says Charles Newman, CEO of cell-phone collector ReCellular, which expects to collect 4 million phones this year. "The challenge has been getting enough used phones."

Fortunately for carriers such as Telispire, refurbished phones of all makes are now more readily available than before: While manufacturers including Nokia (NOK), Motorola (MOT), and Sony Ericsson still don't offer refurbished phones in the U.S., they help collect old models, some of which go to refurbishers that sell to the U.S. Following California's lead, starting this year, cell-phone retailers in New York State have to accept old cell phones from customers at no charge. Maine is expected to enact similar legislation in January.

And the quality of refurbished phones has improved. "Even five years ago, the thought of having a refurbished handset was a kiss of death," says Cook. But after a shakeout among refurbishers, most of which are based in China, "the guys that are left are putting out quality products."

Lessened Stigma

The implications for handset makers are mixed. For some newcomers, like Apple, refurbished models could offer a way to expand the market. Experts estimate that less than 1% of U.S. wireless subscribers can afford the expensive iPhone, with its cheapest new model priced at $499. By offering refurbished versions, Apple manages to reach new users without coming out with new products. "It's a way to move the needle a little bit on retail customers," says Neil Strother, an analyst at JupiterResearch.

But more established handset makers may see some of their sales of new phones cannibalized by refurbished models. "In emerging markets, that's an issue," concedes Richard Windsor, an analyst at Nomura. The trend hasn't yet been felt in the U.S., but it could before long.

For now, though, some large U.S. carriers are still holding out, not wanting to dilute their brand by selling used phones. "We offer a portfolio of over 30 devices, which range in price to fit most budgets, so there is no need to sell refurbished phones," writes Verizon Wireless spokesperson Brenda Raney.

Should Verizon Wireless change its mind, perhaps it could follow in the footsteps of Palm (PALM), which bills used models as "open box." "Remember, cars used to be 'used.'" says Richard Doherty, director at consultancy the Envisioneering Group. "Now they are no longer 'used'; they are 'preowned.'"


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