Osborne Effect

Osborne

The Osborne effect is a term referring to the unintended consequence of the announcement of a future product ahead of its availability and its impact upon the sales of the current product.

Pre-announcement is done for several reasons: to reassure current customers that there is improvement or lower cost coming, to increase the interest of the media and investors in the company’s future prospects, and to intimidate or confuse competitors. When done correctly, the sales or cash flow impact to the company is minimal, as the revenue drop for the current product is replaced by orders or completed sales of the new product as it becomes available.

The Osborne effect occurs when this pre-announcement is made either unaware of the risks involved or when the timing is misjudged. Customers react immediately by canceling or deferring orders for the current product, knowing that it will soon be obsolete. Inventories increase and the company must react by either discounting or lowering production of the current product. Either of these choices depresses cash flow. In the actual case of Osborne Computer Corporation, the company took more than a year to make its next product available. It ran out of cash and went bankrupt in 1985. Pre-announcing products in a way that incurs the Osborne effect is an example of a self-defeating prophecy, as the announcement of the new product is ultimately responsible for its own abandonment. At the very least, any unexpected delays may mean the new product comes to be perceived as vaporware (products that are announced but never released), further damaging the company’s credibility and thus profitability.

The Osborne Effect states that prematurely discussing future, unavailable products damages sales of existing products. The name comes from the planned replacement of the Osborne 1, an early personal computer first sold by the Osborne Computer Corporation in 1981. In 1983, founder Adam Osborne pre-announced several next-generation computer models (the ‘Executive’ and ‘Vixen’ models), which had not yet been built, highlighting the fact that they would outperform the existing model. A widely-held belief was that sales of the Osborne 1 fell sharply as customers anticipated those more advanced systems, leading to a sales decline from which Osborne Computer was unable to recover.

This belief appeared in the media almost immediately after the company’s 1983 bankruptcy: ‘To give the jazzy $2495 Osborne Executive a running start, Adam began orchestrating publicity early in 1983. We, along with many other magazines, were shown the machine in locked hotel rooms. We were required not to have anything in print about it until the planned release date in mid-April. As far as we know, nothing did appear in print, but dealers heard about the plans and cancelled orders for the Osborne 1 in droves. In early April, Osborne told dealers he would be showing them the machine on a one-week tour the week of 17 April, and emphasized that the new machine was not a competitor for the Osborne 1. But dealers didn’t react the way Osborne expected; said Osborne, ‘All of them just cancelled their orders for the Osborne 1.” Osborne reacted by drastically cutting prices on the Osborne 1 in an effort to stimulate cash flow. But nothing seemed to work, and for several months sales were practically non-existent.

Interviews with former employees cast doubt on the idea that Osborne’s downfall was caused solely by announcement ahead of availability. After renewed discussion of the Osborne Effect in 2005, technology columnist Robert X. Cringely interviewed ex-Osborne employee Mike McCarthy. Purportedly, the new Executive model from Osborne Computer was priced at US$2,195 and came with a 7-inch (178 mm) screen, while competitor Kaypro produced a computer with a 9-inch (229 mm) screen for US$400 less. The Kaypro computer had already begun to cut into sales of the Osborne 1 (a computer with a 5-inch (127 mm) screen for US$1,995), but inventories of the Osborne 1 cleared out, and customers switched almost entirely to the Kaypro. However, this only proves that there were other factors involved in the organization’s downfall—it does not prove that the Osborne effect was a myth. Additionally, CEOs that have made grave errors of this nature are rarely expected to admit fault in interviews.

In 2005, ‘The Register’ quoted Osborne’s memoirs and interviewed Osborne repairman Charles Eicher to tell a tale of corporate decisions that led to the company’s demise. Apparently, while sales dipped after the initial announcement, they eventually began to pick up, and cash started flowing into the company. Then, a vice president discovered some fully equipped motherboards for the older models, worth US$150,000. Rather than discard the motherboards, the vice president sold Osborne leadership on the idea of building them into complete units and selling them. Before long US$2 million, far more money than anybody anticipated, and more than the company could afford that time, was spent to turn the motherboards into completed units: For CRTs, RAM, floppy disk drives, and to restore production and fabricate the molded cases. In his autobiography, Osborne described this as a case of ‘throwing good money after bad.’ It was then that the company folded due to debt.

In 1978, North Star Computers announced a new version of their floppy disk controller, which had double the capacity, to be sold at the same price as their existing range. Sales of the existing products plummeted and the company almost went bankrupt.

When Sega began publicly discussing their next-generation system, barely two years after launching the Saturn, it became a self-defeating prophecy. This move, combined with Sega’s recent history of short-lived consoles, particularly the Sega Mega-CD and 32X which were considered ill-conceived ‘stopgaps’ that turned off gamers and developers alike, led to a chain reaction that quickly caused the Saturn’s future to collapse. Immediately following the announcement, sales of the console and software substantially tapered off in the second half of 1997, while many planned games were canceled, causing the console’s life expectancy to shorten substantially. While this let Sega focus on bringing out its successor, premature demise of the Saturn caused them financial problems. Even though the Dreamcast did address many problems found in the Saturn, Sega’s bad reputation caused customers and publishers to be skeptical and hold out, which led to its demise as well.

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