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INNOVATION ECONOMY

Technology trade-ins

Firms offer a way to get cash for older gadgets that might otherwise be tossed in a closet — or the trash

(Bill Greene/Globe Staff)
By Scott Kirsner
Globe Correspondent / June 6, 2010

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Tomorrow morning, Apple Inc. chief executive Steve Jobs is expected to unveil the next iteration of his company’s hot-selling iPhone at a gathering of Apple software developers in San Jose.

Not long afterward, a Boston company, Gazelle.com, expects to start receiving an influx of older iPhones. The company will send cash to the former owners, as much as $200 for a high-end model in good condition, and then resell the phones on the auction site eBay.

Gazelle, along with a Lawrence-based rival, NextWorth Solutions Inc., help gadget-craving consumers trade up to the latest and greatest without leaving yesterday’s model moldering in a desk drawer.

“Consumers want the shiny object, the new iPad, but they don’t want to sell the old thing,’’ says Israel Ganot, Gazelle’s chief executive and a Silicon Valley émigré who once worked at eBay and PayPal. “Only about 1 percent of consumer electronics get resold. This is where e-commerce was 15 years ago.’’

Both companies say they’re growing rapidly, raising new funding, and sealing deals with retailers that want to chisel away at consumers’ reluctance to buy new electronics by giving them an in-store credit for bringing in an older device not unlike driving your trade-in to the car dealership. (Gazelle is launching pilots this summer with Wal-Mart Stores Inc. and Sears.)

Both companies have survived by adjusting their original business strategies to a shifting marketplace, and both say the moment is right for a service that is more “green’’ and more recession-friendly than simply tossing an old gadget in the trash or in a closet.

Gazelle spent the first few years after it was founded in 2006 trying to persuade retailers like Best Buy Co. and Radio Shack Corp. to set up in-store kiosks that would tell consumers what their old electronics were worth, and let them trade them in for store credit. The company had raised about $2 million from individual investors. But although retailers understood the benefits, they were slow to commit. “The message was, ‘We love you, but call us back in a year,’ ’’ says Ganot. In mid-2007, with about half of the money left in the bank, Ganot decided to offer the trade-in service directly to consumers on the Web.

“The green aspect of the business started to take off, both with consumers and the media,’’ Ganot says. “And going directly to consumers let us control our own destiny.’’ Ganot has since managed to raise $12 million more from venture capital firms, including the Cambridge office of Venrock and Boston-based RockPort Capital Partners.

At Gazelle’s headquarters, each day the mail is delivered, the company receives about 300 boxes from consumers. Each box contains two items, on average. Consumers send in everything from laptops to video game systems to conference room projectors to GPS devices. (For higher-value items such as digital cameras, Gazelle will send consumers priority mail envelopes to encourage them to ship the item.)

The sender has already received an online estimate of the item’s value, based on its condition and whether it is being sent with all the original accessories. But inspectors at Gazelle must confirm the item is exactly as advertised (about 15 percent of the time, it’s worth either a bit less or more than the online estimate). Of the company’s 107 employees, about 25 work as inspectors. Once the condition is verified, the company issues payment to the former owner. The company maintains a database with information about the current resale value of about 250,000 items, so it can be sure to make a profit on every trade-in.

Most items get resold on eBay, but some go to wholesalers and refurbishers. A small percentage of items that don’t have any resale value are recycled, at no cost to the owner. (Gazelle zaps all the personal data from devices.) Amazingly, most items sit for just 10 to 12 days in Gazelle’s storage rooms before they find a new home. Ganot says the company is now handling nearly 20,000 items a month, about triple the volume of a year ago, and the company is hunting for space to expand.

Ganot says his company is on the verge of closing a new round of financing, and that Gazelle is considering reselling some items through a new site that it would control, allowing it to circumvent eBay’s auction fees. (Ganot, in addition to his experience at eBay, was a member of the founding team at Kozmo.com, a home delivery service that raised $280 million in venture capital and has been ranked as one of the top 10 dotcom-era flops.)

And once Gazelle had proven on its own that consumers wanted to wring some value from their graying gadgets, retailers suddenly started calling. Gazelle now powers the trade-in mechanism on Costco Wholesale Corp. and Wal-Mart’s websites, and by 2011, Ganot predicts, Gazelle’s service will be available in hundreds of thousands of stores. The company is experimenting now with accepting items as large as flatscreen TVs, and Ganot says he can envision moving into categories like bikes, power tools, and golf clubs.

NextWorth was originally started in 2005 as a kind of consignment service for online auctions. Customers could either drop items at NextWorth’s office, or have a NextWorth employee come out to assess it and take photos. But the company evolved to focus on electronics that are sent in via mail. Unfortunately for NextWorth, two of the big retailers it worked with — Circuit City Stores Inc. and Tweeter Home Entertainment Group Inc. — went out of business. Founder David Chen says the company is close to announcing a new in-store program with a major retailer. And NextWorth recently hired Jeff Stone, formerly a senior executive at Circuit City and Tweeter, as its president.

NextWorth, with 25 employees, is smaller than Gazelle, but Chen says the company outsources more of its work to outside partners. The company won’t say how much funding it has raised, but a NextWorth board member tells me it is much less than Gazelle.

Both companies might have arrived a bit too early at a market that is just starting to develop. And both companies face the same challenges. One is persuading consumers to accept a lower price for an item than they might get by selling it themselves on eBay or Craigslist. (Gazelle will give you $15 for a Canon PowerShot digital camera that you might be able to sell for $50 or more on eBay, for instance.) The other challenge is building awareness and significant trade-in volume as larger retailers like Amazon.com and Best Buy launch and promote their own trade-in programs.

But the urge to acquire the hottest new device on the market like the latest iPhone or iPad from Apple will help both Gazelle and NextWorth. “When the iPad was released earlier this year, suddenly we started to see a lot of people trading in their older e-book readers, like the Kindle,’’ Chen says.

Ganot likes to use the term “re-commerce’’ to describe what his company does. “This is a new space,’’ he says. “And we think it could be a billion-dollar business.’’

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter@ScottKirsner.