Used Cell Phone, Anyone?

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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.'"

Kharif is a reporter for BusinessWeek.com in Portland, Ore.