More electronics buyers skip extended warranties
There was a time when Michelle Andrew wouldn't think of buying a personal computer without paying for an extended warranty to cover possible...
Minneapolis Star Tribune
MINNEAPOLIS — There was a time when Michelle Andrew wouldn't think of buying a personal computer without paying for an extended warranty to cover possible repairs.
But today, Andrew can find a solution to most of her computer problems by visiting online message boards. Or, if she's completely stumped, she consults one of her two tech-minded teenage sons.
"Some of that initial fear that drove me to buy warranties has dissipated," said the 44-year-old paralegal. "I guess I've outgrown them."
This year, Americans will spend an estimated $6 billion on extended warranties for electronic goods. But as consumers' comfort level with technology grows — and as they've wizened to the often-crass economics of such plans — the popularity of warranties is showing signs of waning.
Best Buy recently disclosed in its annual report that extended warranty sales as a percentage of revenue fell 12 percent during the past fiscal year. At Circuit City, warranty sales last year fell 8 percent as a percentage of revenue.
The declines are welcomed by consumer advocates, who have long argued that extended warranty contracts, also known as "service contracts" or "protection plans," are too pricey and often unnecessary.
"There appears to be a growing awareness that these are a sucker's bet," said Tod Marks, a senior editor at Consumer Reports magazine.
Retailers push multiyear warranties aggressively because they're a huge source of profit. Stores keep 40to 50 percent of what they charge for warranties, according to Warranty Week, a trade newsletter. Only about 20 percent goes toward repairs.
Last year, Best Buy collected $790 million in commissions from the sale of extended warranties on items from big-screen TVs to computers. That's more than half of the retailer's $1.38 billion in earnings for the year.
"Retailers push the warranties hard, and they push them hard because they make a pile of money," said Robert Krughoff, president of Consumers' Checkbook magazine in Washington, D.C.
Expensive products and a fear of new technology traditionally have pushed people into extended warranties. The arrival of ultra-thin plasma TV sets, high-speed laptop computers and portable music players in recent years fueled the demand for warranties because the products seemed less comprehensible to consumers, said Eric Arnum, editor of Warranty Week.
"When plasma TV sets first came out, they seemed so exotic," Arnum said. "You mention 'plasma,' and you're talking about the surface of the sun, the fourth state of matter, and, well, you better insure that. It just sounds scary."
But now, the novelty of many of these digital consumer electronic items has worn off, and prices have plummeted.
Over the past two years, the average price of a flat-panel TV set has fallen more than a third, to $1,147, according to market research firm NPD Group.
"When a TV is $3,000, you're far more inclined to attach a $300 warranty to it than if the TV costs $1,200," said Colin McGranahan, a retail analyst at Sanford C. Bernstein in New York.
Increasing product reliability also has made consumers less inclined to buy extended warranties. A survey last year by Consumer Reports found just 10 percent of subscribers who bought a digital camera had to get it repaired within three years.
"The odds that you're going to need an extended warranty is extremely rare," Marks said.
Consumer Reports recommends against buying extended warranties in all but a few cases. For instance, a service contract might make sense for Apple computers because the company offers only 90 days of free tech support (and charges $49 for service calls beyond that period).
It's also worth considering extended warranties for rear-projection TVs, which are three times more likely to need repairs than other types of television sets, according to the magazine.
In most cases, though, consumer advocates say extended warranties are not worth the money.
For instance, repair rates for laptop computers — 43 percent — are among the highest of all consumer electronic products, according to Consumer Reports. But many problems occur after the coverage period of a typical extended warranty, the magazine found. And warranties typically cost about the same as the repair.
"The best idea is to take the money you would have spent on a warranty and put it in the bank," Marks said.
"In the unlikely event that something goes wrong, then you've got the money to repair it. And if nothing does go wrong, then take your spouse out to dinner."