The Osbourne Effect

Companies – especially tech companies – face the difficult task of convincing consumers to buy future products… while at the same time getting people to also buy their current products. I’d guess that all of us have delayed a purchase at one point or another. Maybe you needed a new desktop computer, but wanted to wait for one with the latest Intel processor or USB 3 ports. Maybe you wanted an iPhone, but instead of getting the current iPhone 4 you waited a couple months for the iPhone 5. Or maybe you wanted to upgrade your HDTV but wanted to wait until LED TVs or 3-D TVs or 240 Hz TVs hit the market.

Believe it or not, there’s a name for this phenomenon. It’s called the “Osbourne Effect” and it comes from the Osbourne Computer Corporation. On April 3, 1981, the company released the Osbourne 1, the first commercially successful portable computer. It was the granddaddy of all laptop computers:

The Osbourne 1

Sales were pretty good at first. The company was selling around 10,000 units a month, which wasn’t bad for a computer that cost $1,795 at the time… which is a whopping $4,464 when adjusted for inflation!

But the Osbourne 1 wasn’t without faults. Although it was truly “portable”, the computer weighed almost 24 pounds (10.7kg), making it difficult to carry through airports. In fact, the Osbourne 1’s designer, Lee Felsenstein, once wrote that he had to carry two units four blocks from his hotel to a trade show and it “nearly pulled my arms out of their sockets”. The computer’s screen was tiny: just 5″ (13cm) across. What’s worse is that the unit’s floppy drive only supported single-sided single density disks, which were too small (even at the time) to support most business applications. Early units also had a failure rate of 10-15%, which is unbelievably high for a consumer product. To give a comparison, early Xbox 360 units had a notorious failure rate of 16%, compared to just 3% for the PlayStation 3 and the Wii.

Early in 1983, company founder Adam Osbourne announced a new model, the Osbourne Executive. Priced at $2,495 ($5,662 in 2012 dollars), the Executive would fix a lot of the problems of the Osbourne 1. It would have a larger 7″ (17.7cm) display, would support double-density floppy drives, would come with twice the memory of the Osbourne 1 (128KB vs, 64KB), and would come with useful software, like Supercalc and WordStar. The Osbourne Executive only worked off AC, although a battery pack with a 1-hour runtime would be made available as an option. But instead of getting lighter, the Osbourne Executive was actually heavier: 28 lbs (13kg).

When computer dealers saw the Osbourne Executive – in small groups in locked hotel rooms, a cloak and dagger scenario right out of a spy novel – they were blown away. But instead of keeping their current orders for the Osbourne 1 and placing new orders for the Osbourne Executive, they did something strange: thinking the Osbourne Executive would be a “game changer”, they instead cancelled their current orders for Osbourne 1s and placed orders for the new, upcoming Executive.

Osbourne Computer’s sales started slipping, so the company slashed prices on the Osbourne 1. But it didn’t help. The company, which had once manufactured 500 Osbourne 1s a day, soon ran out of cash. The company declared bankruptcy before the Osbourne Executive ever came to market.

But while the “Osbourne Effect” of badly managed expectations is a popular example in university economics, marketing, management and computer science classes, one might ask: is the story true?

Some folks prefer calling it the “Osbourne Myth”, which acknowledges the original tale while dismissing it at the same time. According to these people, it wasn’t just the announcement of the Osbourne Executive that killed the company. According to former employee Mike McCarthy, competition from Kaypro, which had released a portable computer with a 9″ (22.86cm) screen that was $400 ($936) cheaper than the Osbourne 1, really hurt Osbourne’s sales. But this, of course doesn’t “dispel” the myth of Osbourne’s demise. It just says that there was more competition in the marketplace than some otherwise remember. Plus, it could be that McCarthy was just playing a bit of “cover your ass”.

In 2005, a former Osbourne repairman named Charles Eicher told website The Register about how an Osbourne executive “found” $150,000 worth of Osbourne 1 motherboards in a warehouse. According to Eicher, the executive convinced Adam Osbourne to convert the motherboards into complete units for sale. So the story goes, the conversion ended up costing $2 million, and that was the real reason Osbourne ran out of cash. Osbourne’s own autobiography from 1984 – Hypergrowth: The Rise and Fall of the Osborne Computer Corporation – noted the incident, and called it “throwing good money after bad”. But is Eicher’s story true? $150,000 worth of inventory in 1982 would be worth $351,281 in 2012 dollars, which seems like an awful lot of inventory to “misplace”. Heck, it’d be a lot for Dell or HP to misplace today, and both companies are orders of magnitude larger than Osbourne ever was. And if Adam Osbourne knew that Osbourne 1 sales were tanking, why would he agree make more Osbourne 1s?

Perhaps we’ll never really know what happened at Osbourne. After all, it was 30 years ago. Many involved in the company are getting older or have passed on (Osbourne, born to an English father in the waning days of the British Raj in India, died in Kodaikanal, India on March 18, 2003 aged 64). And others who led Osbourne have an obvious incentive to downplay the company’s faults or their role in it. So while the “Osbourne Effect” might not be 100% true, it’s still an important tale for business leaders of the future.

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