Osborne effect
Encyclopedia
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
, further damaging the company's credibility and thus profitability.
, 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:
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 inches (177.8 mm) screen, while competitor Kaypro
produced a computer with a 9 inches (228.6 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 inches (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 cannot be expected to admit fault in interviews.
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. 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.
Some time and a few bad decisions later, a staggering US$2 million, far more money than anybody anticipated, were spent for the CRTs, RAM, floppy disk drives, and to restore production of molded cases. It was then that the company folded due to debt.
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 of the problems with the Saturn, Sega's bad reputation caused customers and publishers to be skeptical and hold out, which led to its demise as well.
A notable more recent example is Sony
's press release on the discontinuation of the launch 60 GB model of its PlayStation 3
system, leading many to believe that waiting until the holiday season would force them to buy the more expensive and less functional 80 GB PS3 bundle (as later revisions lacked backwards compatibility with the Playstation 2
and were missing extra USB ports & memory card slots). This may have contributed to increased sales of the 60 GB system (though the effect would be difficult to determine, due to the proximity to the initial price drop). In fact, Sony lowered the price of the 80 GB version to match the US$499 price, and introduced a new 40 GB system at a lower price of US$399.
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
Osborne Computer Corporation
The Osborne Computer Corporation was a pioneering maker of portable computers.-The Osborne 1:After Adam Osborne sold his computer book-publishing company to McGraw-Hill in 1979, he decided to sell an inexpensive portable computer with bundled software and hired Lee Felsenstein to design it...
, 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
Self-defeating prophecy
A self-defeating prophecy is the complementary opposite of a self-fulfilling prophecy: a prediction that prevents what it predicts from happening. This is also known as the "prophet's dilemma"....
, 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
Vaporware
Vaporware is a term in the computer industry that describes a product, typically computer hardware or software, that is announced to the general public but is never actually released nor officially canceled. Vaporware is also a term sometimes used to describe events that are announced or predicted,...
, further damaging the company's credibility and thus profitability.
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 1Osborne 1
The Osborne 1 was the first commercially successful portable microcomputer, released on April 3, 1981 by Osborne Computer Corporation. It weighed 10.7 kg , cost USD$ 1795, and ran the then-popular CP/M 2.2 operating system...
, an early personal computer first sold by the Osborne Computer Corporation
Osborne Computer Corporation
The Osborne Computer Corporation was a pioneering maker of portable computers.-The Osborne 1:After Adam Osborne sold his computer book-publishing company to McGraw-Hill in 1979, he decided to sell an inexpensive portable computer with bundled software and hired Lee Felsenstein to design it...
in 1981. In 1983, founder Adam Osborne
Adam Osborne
Adam Osborne was an American author, book and software publisher, and computer designer who founded several companies in the United States and elsewhere.- Computers :...
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:
The Osborne Myth
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, columnist Robert X. CringelyRobert X. Cringely
Robert X. Cringely is the pen name of both technology journalist Mark Stephens and a string of writers for a column in InfoWorld, the one-time weekly computer trade newspaper published by IDG.- Biography :...
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 inches (177.8 mm) screen, while competitor Kaypro
Kaypro
Kaypro Corporation, commonly called Kaypro, was an American home/personal computer manufacturer of the 1980s. The company was founded by Non-Linear Systems to develop computers to compete with the then-popular Osborne 1 portable microcomputer...
produced a computer with a 9 inches (228.6 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 inches (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 cannot be expected to admit fault in interviews.
On 20 June 2005, The Register
The Register
The Register is a British technology news and opinion website. It was founded by John Lettice, Mike Magee and Ross Alderson in 1994 as a newsletter called "Chip Connection", initially as an email service...
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.
Some time and a few bad decisions later, a staggering US$2 million, far more money than anybody anticipated, were spent for the CRTs, RAM, floppy disk drives, and to restore production of molded cases. It was then that the company folded due to debt.
Other examples
In 1978, North Star ComputersNorth Star Computers
North Star Computers was originally named Kentucky Fried Computer and changed their name prior to the release of their Horizon product, an eight-bit business computer that was shipped with the then industry-standard CP/M operating system or North Star's proprietary operating system, NDOS.While...
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
Sega
, usually styled as SEGA, is a multinational video game software developer and an arcade software and hardware development company headquartered in Ōta, Tokyo, Japan, with various offices around the world...
began publicly discussing their next-generation system, barely two years after launching the Saturn
Sega Saturn
The is a 32-bit fifth-generation video game console that was first released by Sega on November 22, 1994 in Japan, May 11, 1995 in North America, and July 8, 1995 in Europe...
, it became a self-defeating prophecy
Self-defeating prophecy
A self-defeating prophecy is the complementary opposite of a self-fulfilling prophecy: a prediction that prevents what it predicts from happening. This is also known as the "prophet's dilemma"....
. This move, combined with Sega's recent history of short-lived consoles, particularly the Sega Mega CD and 32X
Sega 32X
The Sega 32X, codenamed Project Mars, is an add-on for the Mega Drive/Genesis video game console by Sega. Its aim was to increase the lifespan of the aging Mega Drive/Genesis system, which was facing stiff competition from the SNES...
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 of the problems with the Saturn, Sega's bad reputation caused customers and publishers to be skeptical and hold out, which led to its demise as well.
Reverse-Osborne
Occasionally, marketing strategies may result in what is described as a "Reverse-Osborne" effect. Selected release of information might spur sales due to fears of future discontinuations or price increases.A notable more recent example is Sony
Sony
, commonly referred to as Sony, is a Japanese multinational conglomerate corporation headquartered in Minato, Tokyo, Japan and the world's fifth largest media conglomerate measured by revenues....
's press release on the discontinuation of the launch 60 GB model of its PlayStation 3
PlayStation 3
The is the third home video game console produced by Sony Computer Entertainment and the successor to the PlayStation 2 as part of the PlayStation series. The PlayStation 3 competes with Microsoft's Xbox 360 and Nintendo's Wii as part of the seventh generation of video game consoles...
system, leading many to believe that waiting until the holiday season would force them to buy the more expensive and less functional 80 GB PS3 bundle (as later revisions lacked backwards compatibility with the Playstation 2
PlayStation 2
The PlayStation 2 is a sixth-generation video game console manufactured by Sony as part of the PlayStation series. Its development was announced in March 1999 and it was first released on March 4, 2000, in Japan...
and were missing extra USB ports & memory card slots). This may have contributed to increased sales of the 60 GB system (though the effect would be difficult to determine, due to the proximity to the initial price drop). In fact, Sony lowered the price of the 80 GB version to match the US$499 price, and introduced a new 40 GB system at a lower price of US$399.