The public is ready for the iPhone 5 and analysts predict that again the phone will break sales records, bolstering Apple's (NASDAQ:AAPL) continuing rise in stock price. What do people do with phones that they had bought a year ago, or sometimes less? These devices have many of the same features of the new iPhone and while the new features may be nice, they are hardly the same reinvention of the smartphone the way the original iPhone was. While new phones are subsidized upon signing a contract, carriers are cutting back on their discounts for new phones and are offering discount plans that come without the phone subsidy. These factors are contributing to an emerging market for used smart phones in which the margins are surprisingly high and competition almost non-existent.
A company that has taken steps to create a marketplace for smart phones and used electronics is uSell.com (OTCQB:USEL). Their innovative portal connects the individual seller with third party buyers who compete to purchase the used item. Potential sellers can choose from 15 partners on uSell.com's network to sell their item at the best price. For example, a Verizon 16GB iPhone 4s in 'good shape' sells for around $230, while the price in store for the same phone with a 2 year contract is $199.99. While the price for these subsidized phones may go down with the introduction of the iPhone 5, the resell cost will probably remain high, because it is very difficult to obtain an iPhone without a contract for a reasonable price. Customers looking to upgrade their phone may be more drawn to selling their old phone than before, due to the ease at getting a high price point and because carriers are cutting back on the subsidies offered for a new phone.
Samsung's Galaxy S III is another popular phone that is very similar to the iPhone. Following Apple's patent litigation, the phone recently became the best-selling smartphone in the U.S. uSell.com sells provides pricing for the phone as high as $203, which is higher than cost of buying it new with a plan, showing that buyers will willingly pay the same prices for a used phone that consumers pay with a plan for one used.
At first glance, it may not make sense, as to why a company would pay so much for a used phone, until you take a glance at what new, unlocked phones cost without a plan to subsidize them. An iPhone 4 and a Samsung Galaxy S III without a contract sell for close to $500 new. It's so easy to overlook this when you walk into a store to buy a phone because they don't list the prices, or even know them most of the time, when a consumer comes in to buy without a contract.
It's expected that sales for the long anticipated iPhone 5 will be mind-boggling, and it is also expected that many of those who had purchased iPhone 3's and 4's will be among those in line to upgrade. 43% of Apple's $108 billion in sales last year can be attributed to iPhone sales, which makes this new release a significant event for the entire electronic marketplace. As people become more educated as to how much that old phone they have now is worth and carriers offer less incentives with their contracts, companies such as USEL are well positioned to take advantage of the rush to buy a new iPhone 5.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.