So long, and so lucrative, that it's actually an important part of Apple's ability to tackle developing markets.
When people in the U.S. buy the newest iPhone model, they shell out between $200 and $400. That doesn't mean the phone costs between $200 and $400.
The phone really costs between $600 and $800. The carrier is paying the missing $400 to Apple. It makes that money over the two years of your contract.
Most people that follow the tech industry know about this. And, most people, who buy a new iPhone realize the carrier is subsidizing the cost of the phone. But, they don't realize by how much.
Israel Ganot, the CEO of Gazelle, a startup that buys used iPhones tells us that people are surprised to find out their old iPhone is actually quite valuable. His company's research shows 51 percent of people just stick their iPhones in a drawer or a closet. Another 31 percent give away their phones or recycle them.
Depending on how old the phone is it could be worth anywhere between $18 (for a five-year old 16 GB iPhone 3G) and $380 (for a 64 GB iPhone 5). In general, if you're buying a new iPhone every two years, your older iPhone will be worth $160 or more.
You can get more money selling the phone on eBay or Craigslist. At Gazelle, you're paying for the convenience, says Ganot.
And regardless of where you sell it, selling it is a smart move if you're buying a new phone. As Ganot points out, selling your iPhone effectively knocks the cost of buying a new phone down to $0. If you pay $200 for a new iPhone 5 to replace a two-year-old iPhone, you can sell the old phone for $200 on Craigslist.
Even if you don't want to knock the cost to zero, you could upgrade on an annual basis and still end up paying a discount. Ganot says this is happening already. When the iPhone 5 was announced, one-third of the iPhones sold to Gazelle were iPhone 4Ss, which was the prior year's model. From there, presumably, users are paying full freight for a new iPhone, but it's being subsidized by Gazelle instead of the carrier.
Plenty of people are skipping Craigslist, and choosing Gazelle, says Ganot. His business is up 100 to 120 percent on a year over year basis. Gazelle is more than just iPhones. It's other smartphones, tablets, iPods, and Macs. He says tablet exchanges are up 8X on a year-over-year basis.
The interesting thing about Gazelle's business is what happens to the phones after it buys them. After collecting a pile of old iPhones, or other high-end smartphones, Gazelle cleans them out, then sells them to wholesalers who distribute them around the world.
Ganot says that Gazelle sells about 75 percent of its inventory to wholesalers. The other 25 percent is sold on Amazon and eBay. Of that wholesale inventory, about 50 percent is here in the U.S. and 50 percent is international.
The international piece is particularly interesting for Apple.
In developing markets like China, the iPhone costs $1,000-$1,200 new, says Ganot. The used iPhones that hit developing markets from companies like Gazelle retail on streets for around $350, says Ganot.
In these emerging markets, even a used iPhone can be more expensive than a new Android phone. But even a used iPhone is an iPhone. It's still a status symbol. And it still works as well as an Android, and it's much better than a Chinese clone knock-off of an iPhone, which is fairly common, says Ganot.
The life-cycle of an iPhone, therefore, looks something like this, according to Ganot: You pay $200 for an iPhone that costs $600 or more. Then two years later, you repeat the process. You sell your old iPhone to Gazelle for $160-$200. It then sells that phone to wholesalers for $250-$300. Then, in an ironic twist, a lot of those old iPhones are shipped to Shenzhen, which is where brand new iPhones are made. From there, they're purchased by distributors who sell them on the streets of places like Vietnam for $350.
In a way, it looks like Gazelle is indirectly in competition with Apple in emerging markets. Apple, after all, doesn't sell a cheap iPhone in those markets. There has to be a reason for that, right? What does Apple think of Gazelle's operation?
Ganot says, "Apple loves us." He says there's a two-fold reason for Apple to love a company like Gazelle. On the one hand, it is subsidizing the purchase of new iPhones. If the cost of buying a new iPhone is $0-$40 in the U.S., then Apple is going to sell a lot more iPhones.
In emerging markets, it gives Apple an entry to markets it's currently limited in. While it might not be hundreds of millions of users, it's thousands of new iPhone users who are signing up for iTunes and getting locked into Apple's ecosystem. Since Apple can't really sell to these people, it's not losing a sale. It's a new user created out of a previous user from a developed market.
As such, the iPhone has a surprisingly long and lucrative life for Apple and its users.