Extended Warranties are for Suckers

by Joey deVilla on November 2, 2006

While I don't often give in to the techie compulsion to have the latest and greatest gear, I think I purchase more tech stuff than the average non-techie, particularly when it comes to computers. Back when I was an independent software developer, I was always a little paranoid about having my computer go out of commission, and so I gladly forked over an extra couple of hundred dollars for the extended warranty.

In the past fifteen years, I've never had to make use of the extended warranty. I've had to make use of the standard one-year warranty twice: once with the faulty hard drive on a Toshiba laptop and once with a company-issued Dell Inspiron laptop whose video card preferred to display static.

That's to be expected. Many products, electronics included, generally fail either very close to the start of their working lives or at the end of their expected lifespan from wear, tear and regular use. The “bathtub curve” is a term that's used by statisticians to describe the probability of failure of these products, and it looks like this:

Bathtub curve

I stopped buying extended warranties around 5 or 6 years ago because I was beginning to get the feeling that they were nothing more than a surcharge for the overly cautious. Between never having had to make use of them, constantly falling prices and the rather suspicious insistence of salespeople that I should buy one, even for items that cost less than 50 bucks, I was getting the gut feeling that they were a rip-off.

Someone's done the math and my hunch was right. A New York Times article titled The Word on Warranties: Don't Bother expains why:

  • They're actually a profit center for retailers. The margins on electronics are very thin, but they extended warranty margins are as high as 80%.
  • It's a sucker's bet: you're betting against the bathtub curve and you're also betting against the trend of falling prices in the belief that the cost of repair will exceed the cost of replacement.
  • A Consumer Reports study shows that only 10% of digital cameras fail in their first five years. For the extended warranty to be valuable, it would have to be less than 10% of the purchase price, yet extended warranties often cost as much as 20% of the item's price. Besides, if you had a five-year old digital camera, you'd probably want to replace it, not repair it.
  • Last year, suckers spent $16 billion on extended warranties.

So take it from us (and the New York Times too): skip the extended warranty.

Link

{ 4 comments… read them below or add one }

1 Anonymous November 2, 2006 at 1:02 pm

How about Applecare for a new MacBook Pro? I have heard that laptops fail quite frequently, and are very expensive to repair.

2 Anonymous November 2, 2006 at 2:24 pm

The one place where I'd disagree is over AppleCare. My older (replaced but still functional and occasionally used) iBook is from late 2001, a full 5 years old now. A few months before its official end of life, it had a bunch of major problems, and all were fixed under AppleCare, leaving me with in many respects a brand new computer (new hd, logic board, airport card, keyboard). It's lasted 2 full years since then, and over Christmas it'll go to my broke adjunct professor friend who's still laboring away on an indigo iBook. Without AppleCare I'd have been stuck replacing my old iBook in late 2004, instead of choosing to upgrade in summer 2006. It's worth it because Apple products, unlike many others, in general last well even far beyond their expected end of use date, so getting free repairs means more useful product life, not fixing an almost-useless-anyway machine.

3 colin roald November 27, 2006 at 9:24 am

For my sins, I spent the year 2000 at a company working on ways to bring extended warranties (“extended service plans”, we were instructed to call them) to online retailers. And yes — retailers make a *ton* of money on them. Which, for an insurance product, almost automatically makes them a very bad deal for the consumer. If you can afford to self-insure the risk (that is, if you can afford to pay for the replacement or repair yourself if necessary), you'll come out way ahead in the long run.
(I'm told the one exception is hot-water heaters, where the lifetime of the tank is more or less determined by the size of a sacrificial anode, and if you buy a longer warranty you get a bigger anode.)

4 any non moose December 17, 2007 at 1:36 am

Corporates often prefer to warranty their purchases, since having a fleet of consistent items is much cheaper than having a hodge-podge of all different ones. Being able to swap one item for an identical one within your own organisation without having to retrain the user(s) is very very useful.

But I agree that for a SOHO or hobbyist, warranties are as you say, for suckers.

There are items where you can predict that it will in fact fail within some months of the warranty expiry date, a certain all-in-one printer comes to mind, where having the warranty gives a good chance of using the warranty if the item sees heavy use. But as you yourself surmise, by that time, most individuals would prefer to simply buy the newer model. And no sane person would buy an all-in-one inkjet .. most of us have figured out to avoid inkjets altogether, huh?

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