Osborne Computer’s bankruptcy and the Osborne Effect

On September 13, 1983, Osborne Computer Corporation, one of the early makers of CP/M computers and a pioneer in portable computing, filed for Chapter 11 bankruptcy. Although it was able to secure funding and emerge from bankruptcy in January 1985, Osborne never fully recovered and was out of business by early 1986.

Osborne Computer Corporation’s bankruptcy

When Osborne filed Chapter 11 on September 13, 1983, it had assets of $40 million versus $45 million in debt. It laid off all but 80 workers and discontinued production of its computers, while seeking all possible options, including taking on more funding or acquisition.

At the time, in its September 19, 1983 issue, Computerworld reported that other computer manufacturers were also in trouble and also seeking acquisition. It cited Fortune Systems Corp and Vector Graphic specifically.

Although Osborne emerged from bankruptcy in January 1985, it remained under jurisdiction of the bankruptcy court. In early 1986, it defaulted on one of its debt payments. When it couldn’t come up with $4 million in cash, its creditors liquidated the company April 9, 1986.

Osborne is one of many computer companies that didn’t survive the 1980s, but I think it’s one of the more interesting ones.

The Osborne Effect

The Osborne effect left a dark cloud over the computer industry in the early 1980s, even among people who didn’t know it by name.

I used computers at school, and developed a keen interest in them, so I asked my parents if we could get one. They didn’t say no, but they did say not yet. And the reason, they said, was because if you buy a computer, by the time you get it home, get it set up, and learn how to use it, there was something better on the market that was cheaper.

That is a slightly exaggerated retelling of the Osborne effect.

The incident that gave the Osborne Effect its name

In 1983, the Osborne 1 was a hot-selling machine that had sold nearly 150,000 units in the United States and 50,000 units in Europe.

Adam Osborne talked up a new computer they were working on, the Osborne Executive. Problem was, it wasn’t ready to go to market yet. The Osborne Executive broke the 64K memory limit the earlier model had. It also had a higher-resolution display.

Demand for the existing Osborne 1 computer evaporated. Dealers cancelled orders. Osborne cut the price to $1,295 and even $995. The cuts didn’t do enough to restore demand. Making matters worse, the Executive was late to market, so, according to the September 19, 1983 issue of Computerworld, Osborne had no income in April and May 1983.

That’s how the popular version of the story goes, at least.

Adam Osborne’s lie

Now here’s where things get controversial. In 1984, Osborne published a memoir titled Hypergrowth: The Rise and Fall of Osborne Computer Corporation. His coauthor was longtime computer journalist John C. Dvorak. The book was 204 pages long. On page 118, Osborne makes a bold confession.

According to his memoir, he made the whole thing up. According to Osborne, they announced the Executive on April 17 and shipped the first units the first week of May. But they couldn’t explain how the company had zero dollars of income in April and May 1983, so he made up a story that would sound plausible. He told Wall Street Journal reporter Eric Larson that he’d preannounced the Osborne Executive, demand for the Osborne I evaporated overnight, and Osborne sold zero dollars worth of computers in April and May. The Wall Street Journal published the story in its July 13, 1983 issue, other newspapers picked up the story and ran with it, and it took a life of its own.

Did Adam Osborne lie?

The problem with this assertion is that the story of the Osborne Effect continued to circulate for decades after Osborne wrote his memoir. But it seems straightforward enough to verify. He said he planted the story July 13, 1983. So the first question is, were there stories about sales-proof Osborne I computers piling up in warehouses before July 1983?

None that I could find. Between Computerworld and Infoworld, they mentioned Osborne only seven times between January 1983 and April 1983. And it was about rumors of Osborne’s stock offering, or the comings and goings of senior executives, including hiring a CEO.

When was the earliest mention of the Osborne Executive that I could find? April 18, 1983, the day after Osborne said his company announced the Executive.

I couldn’t find any account of the Osborne Effect from before July 13, 1983. By late July, other publications were reporting it as fact, including stating Osborne preannounced the Osborne Executive “several months ago.”

I’m inclined to believe Adam Osborne’s story that he made up the preannouncement story to cover up Osborne managing to make zero dollars for two months in 1983.

Problems with the Osborne Executive

Now, even if the Osborne Effect was a work of fiction that Osborne himself devised to cover up bigger problems at Osborne Computer Corporation, I still take issue with how Osborne marketed the Executive.

It wasn’t hard at all for me to find ads for the product. It just happened the first ad I found was in the June 6, 1983 issue of Infoworld, but I found the same ad in other publications around the same time. And one of the first things I noticed in the ads was a promise of IBM compatibility, but didn’t make it clear whether it was built in or an option. Yet, modern mentions of the Executive never mention IBM compatibility.

So was this an option? And was it something Osborne ever delivered?

I found the answer in Osborne’s book, Hypergrowth: It was an add-on, something Osborne couldn’t design itself and was relying on a third party to develop and deliver. Making matters worse, multiple third parties were working on it and struggling to deliver it. There would be an IBM-compatible Executive, eventually, but the option was vaporware at that point.

So the Executive wasn’t everything it promised. The ads made it sound like a wonder computer that could run both IBM software and CP/M software for $2,495. But then you found out the IBM compatibility option was extra. And not available yet. When it would be available and what it would cost were also unanswered questions.

Without IBM compatibility, it was just an Osborne I with higher capacity disk drives, a 7-inch screen, and 128K of RAM. If I was in the market for something like that, I needed to take a look at the Kaypro II. It didn’t have the extra memory but it had a bigger screen and cost less.

Osborne’s other problems

Although Osborne Computer Corporation was able to reorganize and continue under new leadership, it never recovered its momentum. It limped along as a former industry darling selling CP/M computers, which was no longer a growth market.

Some people argue it was the rise of MS-DOS and portable computers running MS-DOS from companies like Compaq and Eagle Computer that ruined Osborne more so than the Osborne Effect. I think both played a part. I also think the effect on the rest of the industry has been understated. If my parents heard about it in the middle of Missouri, almost exactly 2,000 miles away from Silicon Valley, other people must have also heard about it.

Osborne’s growing pains

But beyond all that, Osborne had growing pains. Adam Osborne had a great idea and found a great engineer to build it, but the company’s accounting practices were widely cited at the time as being sloppy enough to sink the company. Like many startup founders, Osborne had a great idea but wasn’t able to find all the people he needed to fully carry out that idea and build the followup. It takes more than an idea and a couple of engineers to build a successful startup.

In his book Hypergrowth, Osborne places a lot of blame on Robert Jaunich, the CEO he hired away from Consolidated Foods. I think this points to a larger problem. Osborne didn’t have a succession plan. Jaunich seemed like a good candidate at first but there were red flags in Osborne’s account of the hiring process. But he also didn’t have any other candidates and he didn’t want to start over.

It seems like Adam Osborne should have known he wouldn’t want to be CEO forever, should have thought of that earlier, and should have made a plan in advance.

Osborne also had a quagmire with another executive, Tom Davidson. He said he should have fired Tom Davidson sooner than he did, yet admitted a few pages later that he missed him when he was gone, because their cost of goods went up after he departed.

Adam Osborne seemed to have a pattern of finding people who were very close to what he needed, but not quite the right fit. And then he didn’t realize it until it was too late, and he didn’t act on it because he didn’t know how to find the right person.

The Osborne I

And it wasn’t all rainbows and unicorns with the Osborne I. Yes, the machine sold as fast as Osborne could make them, for a while. But then Osborne released upgrades for them. A double density disk controller was first, and an 80-column board was second. According to Hypergrowth, Osborne offered the upgrades to existing customers. Dealers didn’t want to install them. So they arranged to ship the machines back to the factory, where, if all went well, customers would be without their computer for about two weeks.

All didn’t go well. They ran into compatibility issues that required some retrofitting to fix. They underestimated how long it would take to upgrade a machine even when everything went well. And they underestimated demand, ran out of upgrades, and had to plunder components that were supposed to go into new systems to upgrade the old systems.

The modicum of truth in the Osborne Effect

There was a real story that resembled the legendary Osborne Effect. When Osborne’s double density controller was ready, there were still un-upgraded Osborne Is in the sales pipeline. So they had to find promotions to sell those now-obsolete models. And the cost of doing so proved higher than expected.

The bottom line on Osborne Corporation’s bottom line

Ultimately what did Osborne Computer Corporation in was its losses for the fiscal year ending in February 1983. After shifting the end of the fiscal year, it went from a break-even year to a $4 million loss. Then it was revised again to an $8 million loss in July. And nobody noticed all this cash walking out the door when it was happening.

This was after losing $1 million in each of its first two years of existence. It managed to pile up eight years’ worth of losses in two months without someone noticing.

While all of this was going on, they were trying to prepare for an initial public offering. Needless to say, their 1983 performance didn’t inspire confidence and they couldn’t go through with the IPO, even though they desperately needed the money. When Atari and Texas Instruments both announced bad quarterly results in July, that soured the market for an Osborne IPO.

And then when they laid off 92 people, Osborne was dismissive in Hypergrowth. Eighty of them were temp workers. The remaining 12 were underperformers who needed to be let go anyway.

The thing I kept coming back to when reading Hypergrowth was that Adam Osborne, in his own words,  surrounded himself with a lot of underperformers and then kept them around too long.

His charisma and charm come through in his writing. So does his intelligence. He has complex mathematical formulas and graphs to explain how he made decisions. But either everyone he hired not named Georgette Psaris or Lee Felsenstein was incompetent, or he passed his share of the blame onto everyone around him not named Lee Felsenstein or Georgette Psaris.

Neither of those options is a great look. I admired Adam Osborne more before I read his memoir.

What killed Osborne Computer Corporation

On Season 1, Episode 22 of The Computer Chronicles, Adam Osborne appeared along with Lori Harp of Vector Graphic. Osborne made it very clear he wasn’t telling the whole story. He said Osborne Computer Corporation’s death was self-inflicted and he would have more to say later. The episode aired in March 1984, about three months before his book was published. Self-published.

He acknowledged in Hypergrowth that there were rumors of a new computer and that sales of the Osborne I slowed from 600 units a day to less than 200 over the course of the spring. In a roundabout way he described the cat and mouse game that Osborne management played. Jaunich would start up production, another exec would slow it down, and a third would stop it completely. Then it would repeat as a cycle. Osborne himself wanted to stop production of the Osborne I, sell down the existing inventory in the sales channel, and use the available cash on Executive production.

Adam Osborne’s hypothesis was that Osborne Computer Corporation spent too much producing Osborne I computers, ran out of cash, and then Jaunich had no options when their IPO chances evaporated. He suggested it was an accounting game to take a big loss in 1983, pre-IPO, then take a bigger profit in 1984, post-IPO. He noted that Memorex did something similar when Jaunich had worked there.

And if Atari and TI hadn’t both had a bad quarter right when they did, Osborne Computer probably would have survived. Adam Osborne would have resigned anyway, but his stock would have been worth $8 million instead of $0.

I’m not 100% certain I believe Osborne. When Infoworld asked Tom Davidson for comment, Davidson said Osborne wouldn’t tell the truth if his life depended on it. But his account, meandering as it is, is the most complete account we have.

What happened to Adam Osborne

Adam Osborne, the company founder, resigned as president when it went bankrupt in September 1983. Osborne went on to form a new company, Paperback Software, publishing inexpensive software targeted at professionals using MS-DOS computers. Lotus, publisher of a popular spreadsheet program and the second largest software publisher in the world at the time, successfully sued Paperback Software for copying the look and feel of its software. Frustrated with the computer and software industry, Osborne moved to India, living out the rest of his life in relative obscurity.

Dave Farquhar

David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.