After raising $65M, smartphone reseller Gazelle sold for $18M

In this 2014 file photo, a customer checks out the iPhone 6 at an Apple store in Paris.
In this 2014 file photo, a customer checks out the iPhone 6 at an Apple store in Paris.

Gazelle Inc., the struggling Boston company that resells mobile phones, has been scooped up by the same company that owns DVD rental service Redbox, but it’s not clear the new owner can keep the business alive amid competition from Apple Inc. and wireless carriers.

Gazelle was quietly purchased late last week by Outerwall Inc., a Seattle-area company that operates several brands of retail kiosks. Outerwall said in a regulatory filing that it paid $18 million for Gazelle, which had collected about $65 million from investors since its founding in 2006.

Outerwall’s most well-known brands are Redbox and Coinstar, which lets consumers claim cash after dumping out their jars of spare change. But Outerwall also owns ecoATM, a kiosk that accepts used smartphones, music players, and tablets.

Gazelle and ecoATM have closely related business models: they pay consumers for used electronics and resell those gadgets, either to wholesalers or retail shoppers.

That business has been a troubled one for Outerwall. The company acquired ecoATM for about $270 million in 2013, but was forced to write down the value of the unit by about $86 million earlier this year after disappointing sales.

In an investor conference call, Outerwall chief executive Erik E. Prusch said adding Gazelle’s online electronics resale business could help ecoATM expand. “The combination of these two gives us greater breadth in the marketplace, gives us greater depth in terms of critical mass,” he said.

Wall Street analysts aren’t convinced, however. Michael Pachter, an analyst with Wedbush Securities Inc., said the Gazelle buy indicates a mistaken commitment to ecoATM’s money-losing business.

ecoATM saw its quarterly revenue inch higher in the past year, climbing from about $29.7 million in the third quarter of 2014 to nearly $31 million in the same period this year. But its losses accelerated, growing from about $6.3 million in the third quarter of 2014 to more than $9.8 million this year.

“Notwithstanding the relatively low price paid for Gazelle, the purchase suggests to us that Outerwall intends to endure at least another year of pain while it hopes its cell phone trade-in business can turn around,” Pachter wrote.

Gazelle saw its fortunes rise after introduction of the original iPhone in 2007. The company said its revenue grew from about $20 million in 2010 to more than $100 million in 2013.

But Gazelle also faced stiffer competition in those years, as Apple, AT&T Inc., and Verizon Communications Inc. offered consumers credit for used devices.

Gazelle also said that in 2013, AT&T made it more difficult for resellers to “unlock” large numbers of used phones from their exclusive connection the carrier’s network. That change in AT&T policy limited the market for those used devices, harming Gazelle’s sales, the company told federal regulators this year.

AT&T declined to comment.

Gazelle and Outerwall declined to offer additional details about the pending acquisition.

Outerwall is clearly searching for its next hit business as Redbox revenue declines and Coinstar sales remain relatively flat, Forrester Research Inc. analyst Sucharita Mulpuru said.

“Once something is a sunk cost, you should stop continuing to invest in it. Especially if it’s a disappointment. But it looks like they’re going to give it one last go,” she said. “DVDs are dying. Coinstar’s not a growing business. What else can they do?”

Updated 8:15 pm with additional detail, comment.