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JULY 25, 2002 NEWS ANALYSIS Where Recycled Cell Phones Ring True A burgeoning business is developing in emerging markets where wireless is nearly the only way to call -- if you can afford a handset
A light bulb went on in Heine's head. Upon returning to his Atlanta home, he started a company called CollectiveGood, which gathered used and discarded cell phones, either for sale abroad or for parts. Over the past 18 months, CollectiveGood has sold the majority of the 15,000 phones collected through his program to carriers Latin America and the Caribbean. MORE PHONES NEEDED. The margins on such sales are small. After spending from $1 to $2 on sorting, refurbishing, and shipping, CollectiveGood typically sells to foreign service providers for about $20 per unit, -- making a $2-per-unit profit. The carriers then resell the phones to their customers for $25 to $30, Heine explains. That represents a 70% to 90% discount on the typical cost of a new cell phone. In January, Heine says his small business has turned profitable. The private company, which employs five people, is one of a growing handful of outfits in the U.S. and Europe trying to make it in the second-hand cell-phone biz. Says Heine: "We can't get enough phones to meet the demand." CollectiveGood still has plenty of inventory to tap. Of the estimated 250 million old phones lying in drawers and forgotten boxes in America's garages, only 1% get reused or recycled, estimates Heine. Today, 137 million U.S. residents have mobile service, according to the Cellular Telecommunications & Internet Association (CTIA), which collects and resells handsets through its Wireless Foundation's Donate a Phone program. Consumers switch to newer models every 18 months, on average -- and that replacement cycle will only get shorter, analysts predict. MANUFACTURERS' PERIL. What benefits Heine, his competitors, and cell-phone users in less developed countries may not be so good for phone makers Nokia (NOK ) and Motorola (MOT ). The second-hand phone market offers meager margins, but 25% to 30% of subscribers in China start out with used handsets, estimates Bryan Prohm, an analyst at tech consultancy Gartner. In Latin America, that number also runs around 30%. As cell-phone service grows worldwide, the impact on manufacturers' revenues could soon increase, says Scott Searle, an analyst with SG Cowen Securities. He sees robust sales in Latin America, China, and Russia over the next few years for used phones, which could take an increasing chunk out of cell-phone makers' potential market. Outside of the U.S., cell-phone outfits rarely subsidize phone purchases. People with annual incomes as low as $600 can't afford to pay $100 to $200 for new models. But they can afford $10 to $25 for a used one. Most users in these regions don't have plans for cell phones. Instead, they buy prepaid time from local cell-phone service providers, usually at a cost of 10 cents to 25 cents a minute. NOKIA TESTS THE WATERS. Service providers seem to see the potential. Executives at AT&T Wireless (AWE ) discovered it's cheap -- and often profitable -- for them to set up a recycling program, says Bob Robida, director of operations for AT&T Wireless' distribution center. Right now, most of the phones it collects get scrapped. But Verizon Wireless, part of Verizon (VZ ), has partnered with the largest second-hand cell-phone recycling company, ReCellular. And up to 70% of the phones collected by ReCellular are sold outside of the U.S., says Jenifer Chambers, strategic account manager at the company. The only players not in this game? Cell-phone manufacturers. Nokia, the No. 1 maker in the world, has been participating in a pilot program, set to end this fall, which tests different methods of collecting and recycling used Nokia phones in the U.S. Most manufacturers don't want to spoil the relationships with their main customers, the service providers, which are behind many of today's recycling and reuse programs. These usually benefit charities, such as organizations helping victims of domestic violence who may need to reach police in a hurry. That makes manufacturers reluctant to talk about the used-phone market. Given the small margins on sales of used phones, the big players would rather focus on more lucrative markets. Their strategy remains to roll out new models with must-have features not available on the older phones, says a Nokia spokesman. They are also partnering with manufacturers in countries such as China, where they aim to make phones that are less expensive, but nowhere near as cheap as used phones. That's what Nokia did earlier this year. Software giant Microsoft (MSFT ) also is stepping in to create cheaper phones. OPENING FOR LITTLE GUYS. Still, these phones will likely be priced at around $100, Searle estimates -- quadruple the price of a used phone. Given the small profit margins, phone makers don't seem eager to scrape the bottom of the market. After all, Nokia likely won't be able to keep it 20%-plus margins if it moves into the below-$100 market, says A.G. Edwards analyst Greg Teets, who predicts: "They'll address the market when it's profitable to be there." For now, the second-hand phone business looks like an opportunity for smaller players. But as pressure on the margins of the larger cell-phone manufacturers increases -- and second-hand phones eat into potential market share -- a light bulb may go on for them, too.  By Olga Kharif in Portland, Ore. Edited by Alex Salkever Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | JULY |
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