Domestic Refurb Market Diminishes

More than a decade ago, when the cost of wireless phones nearly rivaled that of today's home computer, refurbished phones appeared to have a promising future as the prospect of a discounted and warranty-backed unit appealed to carriers and customers alike.

Since that time, however, several factors have conspired to stifle the refurbished phone market ... at least in the United States.

Out with the Old ... Many carriers have found that refurbished phones no longer compete as effectively with their newer and comparably priced cousins. The 25% to 30% discount on a $3,000 unit in 1983 or a $1,500 unit in 1987 proved much more attractive to consumers than a similar discount on a $100 unit today. Increased competition in the marketplace also has hampered the competitiveness of refurbs, as carriers often further subsidize the prices of new units for their customers as an incentive to subscribe.

Today, when forced to choose between a new phone and a refurbished unit in roughly the same price range, carriers said there really is no contest.

"The prices of phones have gone down to the extent that I can buy a brand new one and sell it for almost the same price," said Shane Tuttle, Cellular South purchasing manager. "So why bother buying a reconditioned phone?"

Volume discounts offered by manufacturers to carriers have helped nurture this sentiment.

"Phones are relatively inexpensive, at least for the bigger carriers, because we get pretty good volume discounts," said Jeff Battcher, BellSouth manager of media relations. "We can just as easily get a new phone that meets the most current standards, has gone through a 'shake and bake' process with our network and we know is not going to cause a problem with our customers."

Battcher's comments echoed the attitude expressed by a number of carriers. Although few questioned the reliability of refurbished phones, most admitted the issue remained a concern when choosing between the two. Simply put, many larger carriers prefer to offer new units and avoid even the possibility of something going wrong to potentially drive away customers.

"It is kind of like buying a used car," Tuttle said. "Even though it has been re-done and the warranty is there, you know somebody got rid of it for a reason -- whether it was just too old for them or it had a problem. And as inexpensive as a cellular phone has become, most would not go through the trouble of buying something that was refurbished or used when given the choice between the two."

As the wireless market grows more competitive, customers have come to expect free equipment and other special offerings, especially when carriers require a long-term service contract or other activation fee. Although fronting a discounted phone and banking that the customer will honor his service contract may involve some element of risk and initial expense to the carrier, most value a long-term agreement and will absorb such extras to keep the customer on-line.

As such, a little bait -- usually consisting of a new phone with the latest offerings -- often becomes necessary.

"A cellular company will often give away a new phone at zero-cost, provided the customer signs a service contract," Tuttle said. "A service contract guarantees them their money back on the equipment and then some."

... In With the Almost New Although not as popular in the new-subscriber category, refurbished phones offer carriers several peripheral benefits, especially for PR and goodwill functions. Carriers and retailers loan them to police and fire departments, the Red Cross, and other agencies to use in emergencies or to non-profit organizations for use in activities. Refurbs also remain popular as demos and in loaner programs, serving as replacements while a customer's unit is sent to the manufacturer for repairs.

"Whenever a customer comes in with a phone that is not working, we give them a loaner phone with their number programmed on it to use while their phone is getting repaired," Battcher said. "It is kind of like a loaner car while you are getting your car repaired."

Carriers also sell damaged, outdated or unsold product to refurbishers and obtain some return on their investment.

"We have a couple of vendors that take our refurbs, clean them up and get them ready for resale," said Tom Murphy, Sprint spokesperson. "While not so much a profit generator, it does enable us to sell the handsets that we have paid money for."

Refurbs provide a viable alternative to selected groups of customers who are attracted to the prospect of saving up to 50% per unit -- at least before the activation or service fees that might later apply. High-end users locked into a long-term contract often can save when replacing expensive equipment that has been lost or damaged. Low-end customers, such as prepay or safety and security users who plan to use the service sparingly, typically can find older units at a substantial discount.

"There is a market out there for the refurbished units, especially among the people taking up a lot of these prepaid services and the first-time safety and security users who just want something inexpensive to throw in the glove box," said Paul Adams, MCI spokesperson.

International Opportunities Refurbishers indicated that the domestic market reflects only a portion of the overall industry. Production and sales volume throughout the refurbishing industry has risen as refurbishers focus on volume to counter shrinking returns on refurbs, according to Bob Haran, strategic accounts manager with ReCellular, one of the largest refurbishers in the industry.

"The market really is doing pretty well," said George Tate, sales rep with refurbishing company Communications Signalling. "(Several refurbishing companies) will get up to about 250,000 to 300,000 units per year, and some of the larger ones do more than that."

Haran, Tate and other refur-bishers each estimated that the combined output of the half-dozen or so major players in the industry will exceed 1 million full- or partially-refurbished units this year, more than double the 1995 total of 500,000 and well above 1990 totals of less than 200,000 units. Production totals do not include the small-scale refurbish-ers that account for an indeterminate number of additional units.

Although production has increased, a decreasing percentage of the units actually will appear back in the domestic market for sale. The international market has played a large role in maintaining these figures, as exporters and international buyers purchase at least 50% of the available units for shipment overseas to less-selective developing markets that demand product.

"We have customers from all over the world -- China, Europe, the Caribbean, Australia, South America, Latin America -- that we do thousands and thousands of phones for," according to Larry Boone, owner of refurbishingcompany ABD Technologies. "We actually have very few local customers."Refurbis hers expect developing countries to continue to serve as a future market for their products. Optimistic figures indicate the number of worldwide wireless users could reach as high as 800 million by 2003 -- well above the current level of 200 million. Such totals promise that as carriers invest in and develop the global market, refurbishers will enjoy a larger base of potential clients.

"There are still a lot of countries that are just starting out," Tate said. "To them it is still 1984, when cellular first came out on the market, so they still have a long ways before they get to where we are at right now."

On to Greener Pastures? It may be these developing nations and selected segments of the domestic market that prove the mainstay for refurbishers. Whether the U.S. market and its 60 million wireless users has been taken out of the equation remains debatable, as even those in the business advocate differing views.

"The refurbishing business will remain viable for the foreseeable future," Haran said. "As long as carriers continue to offer new phones with new technology and new features, high-end users will continue to upgrade and trade in their old units, and entry-level users on the lower tiers will seek them out. We just have to continue to penetrate those lower tiers."

Other refurbishers and carriers said they thought that falling prices and more attractive alternatives will continue to draw away potential customers.

"Domestically, it is decreasing," Tate said of domestic sales numbers. "When we were selling them a few years ago, business was real good because people could buy a used phone and sell it (at a reduced price). But now these carriers are giving away brand new phones for free ... and who wants to get a used phone for free over a new phone?"

International prospects likely will keep refurbishers in business for some time. Domestically, however, inexpensive products and the attitude toward newer and better eventually will drive the refurbished phone market to greener pastures.

"It was a worthwhile cause at that point in time," Tuttle said. "But I think it will get to the point where it will be irrelevant and won't even be worth the effort. There just won't be a large enough market for them."