IPhone trade-ins shave device price in promo frenzy

Many of the people rushing to buy an iPhone 6 tomorrow will fund the purchase with a currency that's growing in value: old iPhones.

Used versions of the smartphone can be worth hundreds of dollars, thanks to rising demand for the earlier models in emerging markets and at home. This year, as many as three- quarters of Americans who upgrade their iPhones will trade in their devices, according to Roger Entner, an analyst at Recon Analytics LLC. That's as many as 22.5 million old iPhones being handed in, up from only about half of users trading in iPhones for upgrades last year.

With IDC projecting that Apple Inc. will sell as many as 65 million iPhone 6 and iPhone 6 Plus devices this year, carriers have blanketed consumers with advertisements: an iPhone upgrade every two years for life, as much as a $300 in credit for old models or promises to top any competitor's promotion with an extra $50. Carriers are willing to help offset the cost of upgrading as the skirmish for customers intensifies. There are already more wireless devices in the U.S. than people, so adding new subscribers typically means winning them from a competitor.

“There's a massive iPhone upgrade cycle going on and the carriers know this,” said Michael Cote, an analyst with the Cote Collaborative in Chicago. “There are a lot of subscribers in play right now. These customers are up for grabs and everyone is trying to hold on to them.”

Pre-orders for the new iPhone models already topped 4 million in the first 24 hours, setting a record, according to Apple. The devices go on sale in stores Sept. 19.

For wireless providers like AT&T Inc. and T-Mobile US Inc., dangling trade-in deals has the added bonus of encouraging upgrades while also helping the carriers offset the cost of the promotions. Carriers can -- either on their own or through a third-party reseller -- refurbish and sell those old devices to help cover some of the cost of getting a customer to join or sign a contract.

For example, Verizon Communications Inc. offers as much as a $300 gift card to customers who trade in a qualifying iPhone in good condition. That helps customers afford the cost of new pricey devices. Before accounting for the promotion, a new iPhone 6 with 16-gigabytes of storage costs $649.99 at Verizon without a contract or financing plan, or $199.99 with a two-year contract. Verizon can then turn around and resell the old model phone to recoup some of that promotional cost.

Getting customers to buy new phones is especially important under increasingly popular installment plans, in which consumers pay the whole value of new phones over several months in return for lower service rates. Carriers like AT&T benefit under the new model because customers pay more in the first two years of installments than under traditional pricing that subsidized the cost of a phone, according to David Heger, an analyst at Edward Jones & Co.

A trade-in promotion “feeds the machine,” he said, by encouraging phone upgrades that bring in more revenue for phone providers offering installment plans.

“There may be still some promotional costs associated with doing these rebates in the short term, but I think the thought is that there's enough value in used iPhones that they can get back most of that,” Heger said.

The booming resale market may be helping no carrier more than No. 3 Sprint Corp., whose shares are up 16 percent since the new Apple devices were unveiled. Sprint's new chief executive officer, Marcelo Claure, founded Brightstar Corp., one of the biggest resellers, and both companies are now owned by Japan's SoftBank Corp.

The relationship with Brightstar has enabled Claure to lock in resale prices for iPhones down the line, giving him an edge in phone financing programs, according to Colby Synesael, an analyst at Cowen & Co.

“They know once you're done with that phone in two years that there's a very definitive price they can get for that device from Brightstar, which also enables them to be able to price more aggressively on these plans,” Synesael said in a phone interview.

In a comparison of total costs over two years for an iPhone 6 with a base level of 16 gigabytes of storage, Sprint's “iPhone for Life” plan -- which lets users upgrade to a new version of the smartphone every two years -- is by far the cheapest of the top four U.S. carriers, according to research by Jonathan Atkin, an analyst with RBC Capital Markets.

Brightstar will likely pay Sprint about $200 for each used iPhone 6 that customers turn in for an upgrade in two years, according to Kevin Smithen, an analyst at Macquarie Group Ltd. That removes the risk that Sprint, based in Overland Park, Kansas, would have to writedown as many as 10 million used phones in two years, Smithen wrote in a research note this week.

Many of these used phones from the U.S. end up in emerging markets in Asia, South America, and eastern Europe, where consumers often can't afford the latest smartphone. At NextWorth Solutions Inc., which lets users trade in electronics for cash or discounts, 75 percent of the iPhones it receives are shipped abroad.

Flipping phones to new users can be a profitable business. For example, reseller Gazelle Inc. may pay a customer $275 for their iPhone5 with 16 gigabytes of memory and in good condition. The same device can command more than $460 on EBay.

While that means that selling a device yourself may lead to the best value if you're willing to do the legwork, the window to capitalize may be slim without a guarantee from a carrier or third-party reseller.

Used iPhone prices plummet dramatically after the announcement of a new phone, dropping about 5 percent within one week of the new devices being announced and by as much as 20 percent within three to four weeks, according to Nik Raman, chief operating officer of USell.com Inc.

While it's not a novel concept, consumers are more aware than ever that they can sell their old iPhones, Samsung Galaxies and other devices instead of socking them away in a drawer or shoebox. Two years ago, only 6 percent of smartphone owners knew that their used devices could be sold. That's up to about 36 percent this year, according to a Gazelle survey of about 1,000 consumers in May.

“Consumer awareness has always been our challenge, just getting people aware that there's value in their old devices,” said Jeff Trachsel, chief marketing officer at NextWorth, which processes hundreds of thousands of phones annually. “There are more promotions now, and the offers are getting richer.”

There's still room to bolster the efforts to reuse or recycle old phones. Less than 20 percent of the 130 million mobile phones tossed aside annually are reused or recycled, according to Movaluate, which appraises used smartphones. That means more than 104 million are discarded in desk drawers or added to landfills.

“Our biggest competitor is still the drawer,” Alyssa Voorhis, senior tech analyst at Gazelle, said in an interview. “It's a huge opportunity. We see insatiable demand all over.”

To contact the reporters on this story: Olga Kharif in Portland at okharifbloomberg.net; Doni Bloomfield in New York at mbloomfiel12bloomberg.net; Scott Moritz in New York at smoritz6bloomberg.net To contact the editors responsible for this story: Sarah Rabil at srabilbloomberg.net Ben Livesey