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Get ready for Wall Street naysayers to cite the 'Osborne effect' for Tesla
Posted on June 09, 2017 by Charles Morris
If Tesla’s Model 3 isn’t the most anticipated product in history, it’s surely right up there (sliced bread comes to mind). Having a backlog of orders that will take years to deliver sounds like a good problem to have, and it is - but it is a problem, and it can be a serious one if not handled properly.
More than one young company has gone out of business after experiencing such massive demand for its products. One that is famous in business lore is the Osborne Computer Corporation. Founder Adam Osborne was one of the developers of the world’s first portable computer. His company’s first product, the Osborne 1, came out in the early 1980s, and it sold well at first. However, when Osborne began showing an improved version, the Osborne Executive, dealers cancelled orders for the Osborne 1, unsold inventory piled up, and the company ran out of cash and died.
Some writers attribute the failure to other causes, including budding competition from Apple, IBM and Compaq, but be that as it may, the company’s history became an oft-cited case study, and spawned a new term: the Osborne effect.
Above: The Osborne 1 computer (Image: Old Computers)
The Osborne effect comes into play when a company announces a future product too soon. Anticipating that there’s something better on the way, customers cancel or delay orders for the current product, slashing the company’s cash flow just when it is needed to meet the expenses of the new product launch.
Could this happen with Tesla? There are several reasons why it's unlikely. Even CNBC's Jim Cramer, a critic of Tesla, reminds us that the capital markets (including deep-pocketed investors like Tencent) have a history of backing Tesla. One other thing - Adam Osborne was no Elon Musk. However, with Tesla [NASDAQ: TSLA] stock hitting all-time highs and short interest (those betting against the stock) ballooning along with it, the Osborne effect could become a mantra for Tesla's naysayers.
Is Elon Musk concerned? He took to Twitter yesterday saying, "Could be worse... these [shorts] want us to die so bad they can taste it... Just wish they would stop sticking pins in voodoo dolls of me. That hurts, ok?"
Above: Elon Musk openly taunting the "shorts" on Wall Street (Twitter: @elonmusk)
Regardless of the Osborne effect, companies do announce new products before they're available, and they do it for good reasons - it reassures current customers, piques the interest of the media, and keeps competitors on their toes. However, the timing has to be right. In announcing the second-generation LEAF, Nissan took pains to sidestep the Osborne effect: it delayed announcing the 2018 LEAF even as competitors GM and Tesla trumpeted their new 200-mile EVs; it made existing leaseholders an offer they couldn’t refuse, allowing them to extend their leases on generous terms and trade up to a new LEAF when it’s ready; and it offered blowout discounts on the remaining 2016 and 2017 vehicles, to clear them from dealers’ lots.
Tesla’s situation is a bit different. Unlike the 2018 LEAF, Tesla's Model 3 is not an upgrade from its predecessor - it’s a downgrade, a lower-priced model - so the Model S remains the company’s top-of-the-line sedan. Logically, there should be little threat from the ghost of Osborne - either you can afford a $70,000 car or you can’t, and if you can, why buy the cheaper model? However, it may be that many don’t grasp the relationship between the two sedans. The name “Model 3” certainly sounds like a next-generation product, and today’s consumers are used to new products that are better and cheaper than their forerunners.
Above: Nissan is still keeping its 2018 Leaf under wraps (Image: Electrek)
Tesla-watchers in the media and on the forums continue to ponder the possibility of Osbornishness in great detail. Elon Musk is plainly well aware of the danger - Tesla salespeople have been “anti-selling” the Model 3 for months, trying to steer prospective buyers to the instant gratification (and, for the company, instant cash) of a Model S. Tesla also went back to offering its free Supercharger incentive for Model S buyers. And, the company penned a blog post and published a chart that compares the two sedans in detail, making it clear which one is the big daddy.
“We’re doing our best to clear up that confusion so people do not think that Model 3 is somehow superior to Model S,” said Musk on a recent conference call. “Model S will be better than Model 3, as it should be because it’s a more expensive car.” He admitted that the company has seen some impact on Model S orders as a result of confusion about the two models. The Model-3-good-Model-S-better message “has not filtered down to all of our customers.”
Above: A look at a blue Tesla Model 3 release candidate "tracked" by a silver Tesla Model S (Source: Michael Schoening)
At Tesla's recent shareholder meeting, Musk continued to anti-sell the Model 3 and pushed customers towards a comparably-priced (and more immediate) Model S deal. He announced that "the used Tesla section of the website is going to get a lot more attention. Particularly if the car is 4 years old, [if] it has got a lot of mileage, you can buy a Model S for as much as a Model 3. It’s like, maybe somebody wants to buy a Model S for $35,000 or $40,000 and they can have that [instead] today.”
Whatever’s up with Model S, interest in Model 3 continues to flourish. Sure, in the coming weeks and months, Model 3 may cannibalize some sales of Model S. But, over the long haul, the sheer volume of Model 3 sales should overcome any early hiccups. Tesla hasn’t offered an updated reservation count since May 2016 (when orders stood at 373,000), but Musk says that the number is consistently rising. “Our net reservations continue to climb week after week,” he said. “No advertising. Anti-selling. Nothing to test drive. Still grows every week.”