When New Callers Opt For Old Handsets

Over the next five years, about 4 billion replacement handsets will be sold around the world. Billions of mobile-phone owners will retire their old devices for something new and cooler -- say, a 3G music/video phone. Their old phones will be thrown away, given to their kids, or tossed into a drawer. If historic patterns hold, only about 5%, or 200 million, will be returned to stores or secondhand dealers.

Still, that's a pretty big number. If every reused phone costs the mobile-phone industry a sale, the lost revenues could easily top $10 billion. That's why companies like Nokia Corp. (NOK ) and Motorola Inc. (MOT ) are hoping that ultralow-price models costing $30 to $40 at wholesale will give buyers reason to buy a new phone instead. "Why buy used when you could get a new phone with more features for the same price?" says equity analyst Albert Lin with American Technology Research in San Francisco.

Truth be told, nobody knows how big the used mobile market really is. A few years back, when the cheapest handsets cost $100, as many as 50% of all new mobile subscribers in Latin America used secondhand or gray-market phones, which are illegally imported to avoid taxes and customs duties, says researcher Yankee Group. Even now, operators in Thailand, Indonesia, and the Philippines say that 15% to 25% of new customers use secondhand phones. Market researcher Gartner figures the number could be 30% in India and 40% in Africa.

Still, there are reasons the secondhand business isn't far bigger. The main one: "Phones tend to die a natural death after four years, so there's a limit to the market," says Yankee Group analyst John Jackson. Batteries have an even shorter life, typically two years, and the cost of a new one can wipe out the profit margin for a reseller. Some phones are "locked" by operators and have to be hacked to be reused. And, of course, selling an old German phone in Tunisia means switching its software to Arabic. That, plus shipping, logistics, and sometimes smuggling, makes the economics pretty lousy. The mobile industry is also pressuring governments to lower duties to help stamp out the gray market.

Operators have mixed views of used phones. They help attract new subscribers who might not otherwise sign up. But a profusion of unknown devices on a mobile network can cause havoc and reduce performance. Worse, says Vodacom South Africa Managing Director Shameel Joosub, secondhand phones are less reliable and come with no warranties, so customer support calls from their owners can savage thin operator profit margins. "All things being equal, we'd rather put good new handsets into the hands of our customers," he says. Nokia and Motorola are hoping to do just that.

By Andy Reinhardt in Paris, with Assif Shameen in Singapore

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