Osborne effect

The Osborne effect is a term referring to the unintended consequences of a company pre-announcement made either unaware of the risks involved or when the timing is misjudged, which ends up having a negative impact on the sales of the current product. This is often the case when a product is announced too long before its actual availability. This has the immediate effect of customers canceling or deferring orders for the current product, knowing that it will soon be obsolete, and any unexpected delays often means the new product comes to be perceived as vaporware, damaging the company's credibility and profitability.

The term was coined after the Osborne Computer Corporation, in which the company took more than a year to make its next product available and eventually ran out of cash and went bankrupt in 1985.^[1][2]

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. However, when the Osborne effect occurs, inventories increase and the company must react by either discounting or lowering production of the current product, both of which depress cash flow.

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, though in general older products lose sales when newer, superior products from the same company come to the market.

Description

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 September 1983 bankruptcy:^[3]

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.^[3]

The Osborne Myth

Interviews with former employees cast doubt on the idea that Osborne's downfall was caused solely by announcement ahead of availability.^[4][5] After renewed discussion of the Osborne Effect in 2005, columnist Robert X. Cringely interviewed ex-Osborne employee Mike McCarthy and clarified the story behind the "Osborne effect". 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.

On 20 June 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.^[5] 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."^[5] It was then that the company folded due to debt.

Other examples

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.^[6]

When Sega began publicly discussing their next-generation system (eventually released as the Dreamcast), 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 customers and developers to be skeptical and hold out, which led to the Dreamcast's demise as well.^[7]

Technology writers have criticised Nokia CEO Stephen Elop's implementation of the plan to shift away from Symbian to Windows Phone for its mobile software platform, as an example of the Osborne Effect. On top of this criticism of existing products was compared to the Ratner Effect and the "Elop Effect" was coined to describe the combination of both premature announcement and negative comments on existing products.^[8][9] Although it was known for some time that Nokia's Symbian phones were no longer competitive against iOS and Android, they still generated significant profit thanks to Nokia's brand recognition until Elop's announcement "effectively transformed the Symbian cash-cow into a dead duck". At the same time, Nokia's first Windows Phone devices would not be ready for a year, and once they were released their sales were not enough to replace the volume and profit of Symbian devices.^[10] Furthermore, the announcement that Windows Phone 7 devices would not be able to upgrade to Windows Phone 8 hurt sales of Nokia's WP7 phones, plus it was a risky move for Microsoft which "can ill afford to alienate people when there are scores of highly capable and affordable Android phones up for grabs. Or years-old Apple iPhones which aren't being prematurely shut out of the iOS playground." ^[11][12]

MakerBot appears to have fallen victim to the Osborne effect: talking openly about a future product significantly reduced the sales of their current product.^[13]

See also

• Internal competition
• Trickle-down effect

References