Apple (AAPL) is expert at stoking desire, seducing consumers to line up and pay a premium for its newest models. At the moment, though, the hottest iPhones are less expensive—and old. Sales of refurbished iPhone 4’s and 4S’s are booming among price-conscious shoppers, especially in fast-growing emerging markets, and U.S. phone companies are racing to outdo one another with trade-in deals for customers willing to part with those models. In April, T-Mobile US (TMUS) launched a promotion that lets iPhone 4 and 4S owners swap for an iPhone 5 with no money down. AT&T (T) countered that offer in mid-May, spotting iPhone 4S owners up to $200, its price for a 16-gigabyte iPhone 5.
The pan-Pacific cell phone trade is more than a decade old, but it’s only now becoming a big enough phenomenon to affect phonemakers’ futures. Boston-based reseller Gazelle expects to ship its millionth device this year from the U.S.—nearly half are sold to regional resellers based in Hong Kong—and its sales should double to more than $100 million, says Chief Executive Officer Israel Ganot. “The desire of consumers in the U.S. to stay current, combined with very high growth in emerging markets, is creating an incredible opportunity,” he says. “There’s truly insatiable demand in some of those markets.” Gazelle’s website offers about $210 for an iPhone 4S with 32 gigabytes of hard drive space, which typically sells for $450.
Sprint Nextel (S), T-Mobile, and AT&T rely on contractors such as ERecyclingCorps and Brightstar, who buy used phones, spend $50 or so to polish up scratches and wipe old data, and resell them at a profit to distributors, usually in Asia. While only 15 percent of people trade in old phones today, that’ll grow as more consumers realize they can get hundreds of dollars for a high-end smartphone instead of tossing it in a drawer, says ERecyclingCorps CEO Dave Edmondson.
Historically, Apple has frowned on the refurbished iPhone industry as an impediment to new sales, but the trade-in boom is helping the company solve two problems at once. It’s clearing unsold iPhone 5 inventory in the U.S. while making used iPhones an option for hundreds of millions of first-time smartphone buyers in Asia, the Middle East, and Africa. Without these cheaper options, Apple would be losing even more share to smartphones that run Google’s (GOOG) Android operating system, which has 59 percent of the global market to Apple’s 19 percent, according to research firm Canalys. “It’s a win-win for Apple,” says NPD Group analyst Stephen Baker. “It’s helping slow the tide of Android.”
In January, Apple was weighing whether to release a less expensive plastic-enclosed iPhone, according to a person familiar with the project who wasn’t authorized to discuss it publicly. The company intended to sell the low-end device, with a cheaper screen and slower chips than the iPhone 5, for as little as $99 without a contract. Now, Apple is working with Brightstar to help T-Mobile and others streamline and expand their trade-in and resale programs, says Bela Lainck, president of Brightstar’s buyback and trade-in group. “Apple doesn’t have a mid-tier device, and this is a way for them to open their ecosystem to a wider base of people,” he says. Apple didn’t respond to a request for comment.
Rising sales of new iPhone 4’s and 4S’s have already decreased the average price of an iPhone to $613 from $635 in the past year. During Apple’s latest earnings call, CEO Tim Cook said the company cut prices to help hold market share and make its phones “more attractive to first-time buyers.” Apple should goose sales further by reselling used models itself rather than rolling out a cheapo new model, says NPD’s Baker. “Why tarnish what you’re doing by bringing out something that isn’t going to meet its standards?” he says. “Apple already has a lower-end iPhone, and it’s the iPhone 4 and 4S.”