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Innovation economy

Market burgeons for pre-owned smartphones

Gazelle GEO Israel Ganot says wireless carriers used to view trade-ins as a nuisance.

Gazelle GEO Israel Ganot says wireless carriers used to view trade-ins as a nuisance.

Have you noticed that suddenly everyone wants to get their hands on your slightly-used smartphone?

In the last year, players like Apple and Walmart have launched phone buyback programs, offering credit that can be used in their stores or toward a newer model. And big wireless carriers like AT&T, Verizon, and T-Mobile have introduced programs designed to get you to lease your smartphone from them, rather than owning it.

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The result is that trading up to a new smartphone is starting to resemble getting a new car, with lots of options around what happens to the old one. Choice is generally good for consumers — albeit sometimes a bit confusing. But changes in the smartphone resale business are making life a lot more challenging for two local companies that pioneered it, Gazelle and NextWorth.

Driving all these changes is a simple fact: Manufacturers like Apple and Samsung release new models frequently and persuade us that new features, designs, and enhancements to battery life are worth an upgrade. (Amazon’s new Fire phone starts shipping later this month, and the next iPhone is expected in September.) About one-third of mobile users upgrade their phones each year — and that number is on the rise, according to data from BTIG, an investment firm in New York.

In the early days of mobile phones, explains Israel Ganot, chief executive of Boston-based Gazelle, “the carriers saw collecting and reselling older phones as a nuisance — it didn’t matter to their economics.” So consumers, who owned the phones at the end of their contract, could choose to resell them on eBay, Craigslist, or through a service like Gazelle or NextWorth.

Gazelle, founded in 2006, and NextWorth, founded in 2005, made it simple to get a quote for how much a used phone was worth, ship it in, and get paid in about a week. They also make sure your personal data is deleted from the device. Both services then list some devices they buy on eBay, or sell them to wholesalers in places like Asia and Latin America.

That grew into a pretty sizable business: Gazelle says its revenue topped $100 million last year, and had been growing at about 150 percent year over year. In 2012, NextWorth had $31 million in revenue; executives declined to provide figures for last year.

Changed attitude

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Retailers that sell phones, like Walmart, Target, and BestBuy, have also seen the appeal of buyback programs. “They can pay the consumer for a phone with store credit, and what they find is that $100 of store credit leads to $150 in spending,” says Mouli Ramani, senior vice president for global partnerships at Billerica-based NextWorth. “They can even pump up the value of that phone you’re trading in a little bit, because they know you’re going to spend the credit with them.”

In addition to taking trade-ins on its own site, NextWorth manages trade-in programs at retailers like Target and Micro Center.

Wireless carriers are the latest to jump into the trade-in business. And there are some very interesting reasons why. In the past, everytime you upgraded to a new smartphone, you typically paid about $200 upfront for a phone that was worth about $650, and so the carrier had to book a $450 expense; it earned that money back over the course of your contract. But a huge wave of upgrades whenever a new phone was released meant a flood of expenses on the books, hurting profits, says Walter Piecyk, a managing director at BTIG’s research unit.

With new leasing programs like Next (from AT&T), Jump (from T-Mobile), and Edge (from Verizon), that $650 cost of a new phone “is divided over about 24 months, and so the carrier can book all of your lease payments as revenue on Day One,” says Piecyk, who follows the telecom industry. That looks better on their balance sheets.

The leasing programs allow regular upgrades, but they also require you to hand in your old phone when you do. As carriers try to shift more customers to the leasing model, NextWorth and Gazelle could face challenges getting inventory since so many smartphones will go right back to wireless operators. (NextWorth manages trade-in programs for some smaller wireless players such as MetroPCS.)

At Gazelle, Ganot says the reality of today’s world is that about 70 percent of smartphone trade-ins will happen at retailers or storefronts operated by wireless carriers, and 30 percent will take place online, where his company competes not only with NextWorth, but also Apple, Amazon, and all the carriers and retailers (which handle trade-ins on the web, as well as in stores). T-Mobile, incidentally, offered the lowest price for my iPhone 5: $155; Gazelle offered $215 and NextWorth offered $189 once I unlocked it. Verizon was willing to pay a whopping $250.

Ganot poses the question that startups encounter once big players get wise to opportunities they spotted first. “Which is the better place to be,” he asks, “trying to get attention and market traction when people don’t understand what you’re doing, or playing in the big leagues, when you have to figure out how to compete with very big companies?”

No small company wants to compete on price or marketing punch with bigger competitors. So Gazelle and NextWorth will have to focus on convenience — and get creative about new services. One possibility Ganot talks about: repairing and refurbishing old phones, and possibly reselling them here in the United States as “certified pre-owned” devices, borrowing a tactic from the car business.

Technology may not repeat itself, but it does sometimes rhyme.

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner and on betaboston.com.
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