Bad deal, as usual

Randall Stross has an article in The New York Times about a new scheme at Best Buy:

“Don't get left behind,” Best Buy advised us in a commercial during the Super Bowl. In the ad, Ozzy and Sharon Osbourne and Justin Bieber appeared in futuristic outfits, pretending to tape commercials for '5G', and then, immediately, '6G' cellphones. “How many bloody G’s are there?” Ozzy muttered.
Best Buy’s answer was essentially this: Don’t worry about it, Ozzy. Just let Best Buy “future-proof your technology” with its new Buy Back program.
There’s fine print, however, that Ozzy might want to read. The buyback plan resembles Best Buy’s pricey extended warranty plans, and unless consumers are actuarial savants and masters of various risk calculations, it may turn out to be an ill-advised purchase for most of them.
Best Buy bills the buyback plan as a way to stay ahead of always-improving technology. Its marketing on its website offers this tantalizing message: “Now you can always own the latest.” The program requires, however, that the customer commit and pay in advance for something that may or may not be used. It’s an option, in the classic sense: you pay for the privilege of holding open the possibility of selling the gadget back to Best Buy.
I spoke recently with George Sherman, senior vice president for service at Best Buy, who offered an illustration of how the program works. When buying a $2,000 television, for example, a customer can pay an additional $179, which will provide a Best Buy gift card with a value “up to fifty percent” of the original purchase if the product is sold back to Best Buy within six months (actually, seven; Best Buy does not begin counting the term until 31 days after the purchase).
The “up to” has its own fine-print qualifications, and the value of the buyback drops steeply over time. The customer receives only “up to ten percent” if the television is sold back between 25 and 49 months. For other products— mobile phones, laptops, netbooks, and tablet computers— the offer ends 25 months after purchase.
There is a risk, however, that new, improved versions of technology won’t arrive as quickly as the commercials suggest. You may end up without a compelling reason to buy a new television within months of spending that initial $2,179.
In the buyback plan’s terms and conditions, Best Buy explains that “time is of the essence”. If the buyback option isn’t exercised by the deadline, it loses all value. That’s not the case with a conventional trade-in arrangement, which Best Buy also offers and doesn’t entail buying a sell-back option in advance.
If the customer has the company buy back the product, Best Buy pays not with cash but with a gift card. If the customer never redeems the option, all the better for the retailer. “Collecting a fee for a service that isn’t used is a wonderful business,” says Matthew Fassler, an analyst at Goldman Sachs.
In the fiscal quarter that ended 27 November, Best Buy reported a five percent decline in comparable-store sales in the United States and Puerto Rico, versus the year-earlier quarter. A category with a large drop was consumer electronics, down 10.6 percent. Best Buy’s services, which include extended warranties, proved more durable, down only 1.5 percent.
Mr. Fassler says Best Buy has not disclosed for many years how much extended warranties contribute to its profits. Consumer electronics retailing is “historically a low-margin business that is dependent on extended warranties for profitability,” he says. “Perhaps extended warranties have become even more valuable to Best Buy recently, as its content businesses, like movies and music, have shrunk.”
Consumers who elect the buyback option must hope they have a clearer view of the future and the new technology it will bring than those who buy extended warranties to guard against unexpected problems. Mark Kotkin, director of survey research at Consumer Reports, says, “The salesperson often tells you: ‘This will give you peace of mind in case you need an expensive repair. I would get it.’ But the odds of a product breaking down during a typical extended warranty period are low.” Even if the product does break, the cost of repair is not much more, on average, than the cost of the warranty, he says. He concludes that extended warranties “are a bad bet”.
Ajay Kalba, a marketing professor at Rice University, agrees: “All the statistics are compelling: in almost all cases, you shouldn’t buy the extended warranty.” Professor Kalra was co-author of a 2009 article published in the Journal of Consumer Research that examined purchase records from the electronics department of an unidentified retailer.
An extended service contract was bought in about three of every ten transactions. The authors noticed subjective considerations: customers were more likely to add the warranty if the product was to be used mostly for fun. Such products, the authors hypothesized, “elicit feelings of guilt and heighten risk aversion”.
Like to know that Best Buy is not making ridiculously higher margins on extended warranties and other services, compared with those on the sales of the products themselves? Here’s a picture of a better future: Best Buy again breaks out the margins earned by each add-on service.
It may be long past the day Ozzy gets his bloody 6G.