Osborne effect

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.^[1][2]

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.

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 April 17, 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^[4][5] 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. 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. 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, CEO's 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.^[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.^{[clarification needed]} 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 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 of the problems with the Saturn, Sega's bad reputation caused customers and publishers to be skeptical and hold out^{[citation needed]}, which led to its demise as well.

Reverse-Osborne

Occasionally, marketing strategies may result in what is described as a "Reverse-Osborne" effect.^{[citation needed]} Selected release of information might spur sales due to fears of future discontinuations or price increases.

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).^{[citation needed]} 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.^[6]

See also

• Self-defeating prophecy

References

1. ^ Osborne, Adam; Dvorak, John C. (1984). Hypergrowth: the rise and fall of Osborne Computer Corporation. Idthekkethan. ISBN 0918347009. 
2. ^ Grindley, Peter (1985). Standards, strategy and policy: cases and stories. Oxford University Press. ISBN 0198288077. 
3. ^ ^{a b} Ahl, David H. (1984-03). "Osborne Computer Corporation". Creative Computing (Ziff-Davis): pp. 24. http://www.atarimagazines.com/creative/v10n3/24_Osborne_Comptuer_Corporat.php. Retrieved April 04, 2011. 
4. ^ Cringley, Robert I. (2005-06-16). "The Osborne Effect". The Osborne Effect: Sometimes What Everyone Remembers Is Wrong. PBS. http://www.pbs.org/cringely/pulpit/2005/pulpit_20050616_000856.html. Retrieved 2009-11-25. 
5. ^ ^{a b} Andrew Orlowski (20 June 2005). "Taking Osborne out of the Osborne Effect". The Register. http://www.theregister.co.uk/2005/06/20/no_osborne_effect_at_osborne/. Retrieved 22 June 2009. 
6. ^ Plunkett, Luke (13 July 2007). "Kaz Confirms 60 GB PS3 Discontinuation". Kotaku. http://kotaku.com/gaming/clustered-fucks/kaz-confirms-60gb-ps3-discontinuation-278414.php.