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Extended warranty firm touts quick fix
More and more, shoppers are heeding the advice of consumer advocates who every holiday season warn against buying extended warranties for television sets, cellphones and computers.
Steve Abernethy doesn't see this as a problem, even though his company, SquareTrade, is in what he has dubbed the "obsolescence-proofing" business. It sells guarantees against any electronic product's failure or your money back, no matter where you bought it.
"My goal is to turn a $10-billion industry into a $5-billion market," with SquareTrade owning most of it, said Chief Executive Abernethy, a Harvard MBA and a former management consultant with McKinsey & Co. "I would like to help collapse an industry."
So far, the industry is only shrinking a bit, with Circuit City Inc. and Best Buy Co., for example, reporting that warranty sales fell as a percentage of revenue last year. On the other hand, extended warranties still play big roles in retailers' bottom lines, according to analysts, with some retailers in some cases making more money off warranties than products.
Sold as "service contracts" or "protection plans," extended warranties last two to several years -- longer than the typical manufacturer's guarantee -- and provide insurance that if gadgets break, they'll be fixed or replaced or the buyers will get refunds.
Some retailers train employees to sell the warranties at checkout registers, where customers feel they must quickly decide what is a reasonable life span for an iPod or a TV, the chances of it breaking and whether the warranty is cheap peace of mind or a sucker's bet. Online retailers and manufacturers also offer warranties on their virtual checkout pages.
People who don't want to make a snap decision typically have 30 days to buy a warranty -- and that's where SquareTrade comes in. It sells insurance on products purchased in the last year.
Abernethy said he didn't blame Consumer Reports and other groups for recommending that shoppers not buy extended warranties, saying they're overpriced and often come with fine print that can make filing a claim confusing. Amazon.com's extended-warranty fine print lists 35 cases in which it won't cover what has broken, including "plasma TVs used in altitude levels above 6,000 feet above sea level."
SquareTrade has some fine print too, Abernethy said, but its pitch is direct: In five days, SquareTrade will either fix a broken electronic product or give a full cash refund.
He said SquareTrade's price was right too. A two-year warranty for a $149 Apple iPod Nano costs $20 at Best Buy and $18 from SquareTrade, for instance. Abernethy said he could sell better service for less because his overhead was much lower; he contracts out the repair work.
SquareTrade was founded in 1999 as an independent dispute resolution business for buyers and sellers on Ebay. The company started to sell warranties to EBay customers in late 2004 for electronics as well as used and refurbished items. Six months ago, it opened up its warranty business to the world beyond EBay.
Toni Vance, 51, an office manager for a gravel business in Douglas, Ariz., steered clear of extended warranties -- except on vehicles -- because they were too expensive. But she bought a portable DVD player from an EBay seller and picked up a SquareTrade warranty for $12, about 10% of the price of the player.
When no sound came out of the DVD player, SquareTrade refunded her money quickly, she said.
When Vance recently bought a suite of kitchen appliances -- a refrigerator, dishwasher and range -- for $2,400 from Costco Wholesale Corp., she skipped the Costco warranty and checked to see whether SquareTrade would cover her. It did. She bought a three-year SquareTrade warranty for $119, about 5% of the purchase price.
"They honored their warranties in a proper manner," she said.
What would happen if one day all of SquareTrade's customers called en masse with broken gizmos and failing gadgets? After all, according to Consumer Reports, 43% of laptops need to be repaired after three years, as do 31% of desktop computers and 13% of camcorders.
Abernethy isn't sweating it. "We charge enough to make a margin and build a sustainable consumer-centered business," he said.