Osborne Effect

The Osborne Effect is the phenomenon where a product announcement induces a negative feedback loop in the companies revenues. Sometimes, when a company announces an upcoming product release, this affects a consumer’s spending pattern and causes them to cancel or defer orders they were planning to make. i.e. you may not order the iPhone 9 if the iPhone X is going to be released in 2 months, at the same MSRP.

History

This term was coined for the Osborne Computer Corporation. The company had released their first product, a personal computer, and begin development for new models. To get publicity going, the founder started demoing prototypes and highlighting the improved performance. Although they asked for nothing to appear in print, word spread and dealers started cancelling orders for the first product.

The cancelled orders affected cash flow and the company needed ways to generate cash to continue production of the new models. They started cutting prices and discounting the original model, to move inventory and get cash flowing again.

Explanation

Companies announce product releases to:

• generate publicity and advertising to engage new customers to existing products
• retain existing customers with future product developments, price-drops, or improvements
• maintain investor interest

When done correctly, it sets up the upcoming products for success once they release.

However, it can cannibalize current sales. The unsold goods might need to be discounted to move inventory. Current production may need to be scaled down due to reduced demand. These compound to affect revenue and margin, reducing cash flow.

With reduced cash and profitability, it can affect the execution of upcoming products. These products are sunk cost (research and development). The lack of cash flow can make it hard to manage the risks of variable cost, such as inventory, advertising, promotions, etc.

Notable Examples

Sega Saturn

The Sega Saturn was a victim of this. The rumours of the Dreamcast release cannibalized sales and game development. Consumers were not going to buy a new console that would be immediately replaced. And game developers were not going to develop games for a short-lived platform. It takes time to invest and develop proficiency with the new platform. This is why game consoles either have backwards compatibility or long lifespans.

Nokia Windows Phone

Nokia phones in pre-smartphone era used Symbian. Despite the growing popularity of iOS, Android, and Windows Phones, Nokia continued to be a household name. By announcing the move towards Windows Phone, this marked the end of Symbian. It took more than a year to release their first Windows Phone. During this time, consumers either migrated away from the brand or waited, killing sales.

And this effect was compounded when Microsoft announced that Windows 7 Phones would not be upgradeable to Windows 8. So when the first Nokia WP7 phones released, they experienced the Osborne Effect again.