Apple’s Newest Product: Used iPhones

on November 11, 2016
Reading Time: 4 minutes

Apple this week started selling refurbished iPhones in the United States through Apple.com. Of course, wireless customers have long had the opportunity to buy used iPhones (and other brands) from their carriers and other retailers and online sellers. However, the fact Apple is now offering the devices direct (along with long-available refurbished products such as Macs, iPads, and iPods) is notable. It reflects both the maturing nature of the market and Apple’s desire to put the iPhone into the hands of more budget-constrained smartphone buyers while still making enviable margins.

The Collapse of Subsidy Models

Just a few years ago, the U.S. smartphone market was almost entirely subsidy driven, which meant few people actually knew how much a smartphone cost. What they knew was, roughly every two years, they could pay $200 to their carrier and get a new smartphone. When U.S. carriers began to move away from the subsidy model, many people were shocked to realize that they were paying upwards of $600 or $700 over the lifetime of that phone. As that realization took hold, the market began to bring forward a long list of new financing options.

Today, buying a smartphone is a lot like buying a car. If you’ve got the cash, you can pay for the whole thing upfront or you can pay through an installment plan (essentially a loan) or you can sign up for something very akin to a car lease in which you pay a monthly fee and get a new phone roughly every year. All of the plans effectively shift the cost of buying a new phone around but none really help lower the cost. That’s why the refurbished market is important. While there are fewer options when purchasing a refurbished phone (you typically pay all up front), the savings can be substantial.

Certified Pre-Owned Luxury Phones

Back in September 2015, Apple launched its own iPhone Upgrade Plan along with its iPhone 6S lineup, directly competing with its carrier partners. Apple customers could pay a monthly fee (starting at $32 per month) and then, one year later, swap that iPhone for the next one. The iPhones Apple is now selling online are likely among the first batch of phones it collected through that program.

Companies such as Gazelle have long bought people’s old smartphones but, in the early days, those phones were typically several years old, which meant companies often shipped them to emerging markets where they were either resold or scrapped for parts. One-year-old phones, on the other hand, still retain a great deal of their value, which is why Apple got into the game itself. In fact, based on IDC’s estimates, Apple is adding significant additional dollars of per-device profit for every phone it first ships out as part of the upgrade program and then reclaims and resells a year later. All the while, it’s also increasing the number of iOS users and bolstering services revenues as a result.

So, for example, right now you can buy a 16GB iPhone 6S for $449, $100 less than the same new model on BestBuy.com (Apple cleverly doesn’t offer a new version of the 6S on its site with the same memory configuration, but a 32GB version of the 6S runs $649 on Apple.com). Similarly, a refurbished 64GB 6S Plus sells for $589, which is $750 new on BestBuy.com.

The result: A buyer who is interested in buying an iPhone now has a wider range of options available to them. The entry-level price for what was Apple’s top-of-the-line phone a little more than a year ago now starts at $449 instead of at $549. Not exactly cheap, but certainly more attainable for somebody who is able to pay the entire cost up front. At some point, I would expect Apple to start selling refurbished versions of the iPhone SE, which has a starting price of $399 new. We could expect prices in the $299 range or lower.

Most companies that sell refurbished phones closely inspect those phones before reselling, offering what amounts to a certified pre-owned checklist at a used car dealer. One of the advantages of buying refurbished from Apple, however, is they not only certifies the phones but they also install a brand new battery and outer shell. The new battery piece is huge, as that’s clearly one of the areas of most concern when buying a used device. And by including the new battery (which costs Apple very little), the company ensures the buyer has a good experience for the life of the product.

Who Buys Used?

Techies might not find the idea of buying a used device appealing (they’re likely the ones signing up for the annual refresh and creating the supply of one-year-old phones) but a growing percentage of regular consumers clearly see the value. In a recent IDC survey of US smartphone users, 26% said they were “somewhat likely” to buy a well-maintained 1-year old phone if the price were lower; another 14% said they were “highly likely” to do so. Among current iPhone owners specifically, those two percentages were 25% and 9%.

While there’s clearly a market for refurbished iPhones here in the US, the larger play for Apple long-term is its ability to move refurbished iPhones into markets outside of the US. For years, pundits have wondered when Apple would ship an inexpensive iPhone geared toward emerging markets. It seems increasingly clear Apple’s answer is to sell refurbished iPhones instead.

It’s a smart plan that will likely work quite well for Apple once it figures out two key issues: Which countries’ consumers are amenable to used products (not all are) and which countries’ regulations will allow refurbs to flow in (not all will). Once Apple sorts these issues out, I expect we will start to see Apple itself promoting refurbished products in more countries at more prices.

At IDC we’re now closely monitoring the used smartphone market as we firmly believe growth here could have a significant impact on shipments of new phones in the future. Apple won’t be immune to the potential negative impact of this secondary market. But, by creating its own virtuous cycle through its upgrade plans and refurbished offerings, it makes more money now and better controls its market position down the road.