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Second-Hand iPhones a Boon for Resellers
By Thomas Gryta, The Wall Street Journal

September 28th 2012

Demand for Apple Inc.’s latest iPhone is strong around the world, but desire for older versions is leading to rapid growth for companies that buy and sell the used devices.

The market for second-hand iPhones, which mostly go overseas from the U.S., is growing as more customers realize that the old device sitting in their drawer might help offset the cost of buying the latest version. This coincides with the iPhone’s global popularity driving a high resale value, thus making the used iPhone a highly sought after commodity.
“We are supply constrained. There is insatiable demand for this product,” said Israel Ganot, chief executive of buyback service Gazelle Inc. He noted that wholesalers buy any iPhones that they can get their hands on, but many people in the U.S. simply aren’t aware of their options.

IPhone owners also may not be aware that their old device could be worth more on the used market than they originally paid for it. That’s because the major U.S. wireless carriers subsidize the cost of each iPhone by hundreds of dollars, in return for locking in that customer for two years. As a result, the prices offered for old iPhones may surprise owners. For example, an iPhone 4S-released last October-with 16 gigabytes of storage can be sold on Gazelle for $240 as of Sunday, compared to the $199 that a typical customer paid for the device.
A similar iPhone 4, released in June 2010, still brings in $145. This trend also affects other popular smartphones. For example,Samsung Electronics Co.’s 16-gigabyte Galaxy S III, released just last June for $199, can be resold for $229 on Gazelle. Of course, the two-year wireless contract that comes with each phone deters people from buying a subsidized iPhone and then quickly re-selling it on the used market at a profit.

Even broken iPhones have value because they can be repaired or used for parts. Prices for AT&T Inc. iPhones tend to be higher on the secondary market because they can be used with more overseas network technology.
With the iPhone 5 launch, the buyback services are seeing new levels of activity. Gazelle said that it gave more than 500,000 quotes online on Sept. 12, the day of the iPhone’s unveiling and has given more than 2.5 million in the past 30 days. The company does almost all of its business with U.S.-based customers.

For Gazelle, the number of trades in the first week since the announcement was five-fold the volume seen a year ago with the unveiling of the iPhone 4S.

Jeff Trachsel, chief marketing officer at NextWorth, said that customer activity for selling iPhones started much earlier this year and on a much grander scale than previous years. NextWorth also provides its services inside Target Corp. stores where people can get cash or credit instantly.

As a launch of a new phone gets closer and passes, prices on the old models tend to drop. Mr. Trachsel said the most recent model tends to lose about 25% of its buyback value over the week surrounding the announcement.

The sales process generally begins by getting a quote online that is typically guaranteed for a few weeks. If the customer likes the quote, they get a free-shipping package for sending the phone. The buyer then inspects the unit to confirm the condition and pays the seller. If the quote is altered because of condition, sellers generally have the option to have the phone returned with free shipping.

When getting the quote, the sites pose a series of questions about the device to determine the value.
Buyers sell the used phones to wholesalers that often send them overseas where telecom carriers don’t usually offer the subsidies seen in the U.S., something that can make the reduced price of a second-hand iPhone attractive.

Quotes for used phones are adjusted regularly based on demand, competitors’ prices and margin targets.
The key for used-phone buyers is making the selling process easy, so sellers don’t go somewhere else, like eBay Inc., where they may get a higher price.

Stephen Hackett, an IT worker in Memphis, Tenn., has sold several older iPhones on eBay in previous years when he has upgraded, but he decided earlier this month to sell his wife’s iPhone 4 through Gazelle. He already has his money and preordered an iPhone 5.
“It was maybe a hair less than I could have gotten on eBay,” he said. “For the amount of trouble that I had to put into it, I think the price was fair.”

In the U.S. only 6% of consumers upgrading their phone either sell their device through a service or do it themselves, according to a Gazelle survey.

“The biggest challenge is to create awareness and change consumer behavior,” Ganot said.
The opportunity has led to multiple players jumping into the market. The major U.S. carriers now have buyback programs, along with Apple, Amazon.com Inc. and Best Buy Co., among others. Start-ups also are emerging.

Jake Resnek, 28 years old, launched buyback service Depstar in January after working in the cellphone wholesale business. He said the company is already buying 5,000 to 10,000 phones per month, and he is expecting an “early Christmas” as volume ramps up with the launch of iPhone 5.

For smaller companies, getting exposure is critical because the business is built on volume. Depstar uses search engine advertising and gets a lot of traffic from uSell.com Inc. Gazelle, meanwhile, is spending more by paying for traditional advertising like television spots, along with pop-up stores around the iPhone launch Friday.

Gazelle also is using booths that have papers blowing around inside for people to try to grab for prizes, and it even sponsored the first five people in line at several of New York’s Apple stores. The moves are reminiscent of promotional tactics seen during the Internet boom of the late 1990s.

“There are a lot of companies trying to pinpoint how to figure out this business,”noted Resnek.

Write to Thomas Gryta at thomas.gryta@dowjones.com

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