In the troubled economic times it is starting to look like resellers are turning to extended warranties as a good way to boost cash.
Buried in Dell’s quarterly results was a surprise statistic which indicated that the importance of the box shifter’s extended warranty program continues to rise.
A few years ago it was twice as large as the product warranty operation, now it’s four times larger and it is accounting for a rising percentage of the company’s total revenue.
Dell has traditionally been a big fan of the extended warranty programme and the idea was nicked by Apple, which has now become the world’s largest peddler of extended warranties.
In its heyday, Dell could control the sales channel from beginning to end through its extended warranty policy, kicking HP which usually sold its computers through retailers. These retailers had their own brands of extended warranty to sell and ended up harming HP’s margins.
The money involved was huge, according to Warranty Week. It estimated that Dell had sold $31.1 billion worth of extended warranties since February 2004, as opposed to the $17.5 billion Apple has sold since October 2003.
Apple saw its extended warranty revenue rocket upwards since the launch of the iPhone in late 2007 and probably matches Dell by now.
All this starts to make it clear why Apple has been so keen to avoid EU laws on warranty. Apple has its AppleCare programme, which is an extended warranty that kicks in after a customer owns a product for longer than a year. EU law says that the warranty for electronic goods should be two years, which makes AppleCare less attractive.
Apple has been in hot water in Italy, and now in Holland, for selling its AppleCare packages without doing enough to tell customers that in most cases they do not need it.
The way resellers can get around all this is to offer extended warranty packages which are more generous than the EU laws. But for this to work, the warranty would still have to expire before the parts on the electronic items start to fall to bits.
Last year, Dell reported $4.3 billion in extended warranty sales revenue, and $1.025 billion in product warranty accruals. Apple sold $5.3 billion worth of AppleCare contracts. It was estimated that the cost of actually fixing Apple products was $1.786 billion in claims paid last year.
This means that even with the large volume of products and the lowering of price of components, the profits that the two biggest warranty peddlers have are extremely high.
