Strategic Alliances & OEM Deals
When creating a product to fill the market needs, you have the option to build, buy or align (with strategic alliances). You can buy the product (like when Sony bought Vegas from Sonic Foundry), buy the company (Microsoft bought Great Plains Software), or OEM (Original Equipment Manufacturer) the product (Dell OEM’s motherboards, video cards, Windows, etc. to create their product)).
Or, you can form an alliance to fill a whole in your product or a gap in your product lineup. Sometimes you need to do all three to have a “complete” product. For example, to build an advanced set-top hardware system, you may buy the manufacturing rights to several chips, OEM the OS and network cards, and form an alliance to add entertainment content (on-line games), to help penetrate key accounts, and jointly promote the overall market category.
The key is to use whichever approach meets your budgetary, financial and strategic goals to most successfully deliver to the customer the complete product.
Watch the Chanimal video, “How to Create Killer Alliances & Dominate Your Market,” a webinar presentation originally delivered for a SoftwareCEO (purchased by CompTIA) webinar. Learn the acid test for every alliance, the four legs you must have when to set up an alliance, how to pick the best partners, how to prospect, what to cover in your meetings, how to multiply your sales force and channel partners, expectations and much more. 55 Minutes.
Alliances Video Comments
“Great work! I am recommending to all of my counterparts. Thanks for sharing and I look forward to seeing information on future workshops from you! Great job!”
“Great content here. You bring many years of experience to the table.”
“After being 10+years in Alliances and Channels it’s the first time I have come across such a consice and well structured package.”
I am always amazed to see how few companies use and maximize strategic alliances. I liken it to a tree (your product) in the middle of the plains. If a wind comes along (the customer becomes disillusions with your product), you must rely on your own roots to stay upright. On the other hand, if you plant your product into the account, and then help other interdependent trees grow around you, it is much harder to rip you out–since your roots are integrated within the other complementary product.
Click here for a link to the job description of an alliance manager that also includes an alliance program start-up plan of action.
Chanimal Alliance Kit
You can download a copy of the Chanimal Alliance Kit (contains the PowerPoint, sample agreements, an alliance worksheet, sample meeting agendas–tons of stuff). Get it free if you register, or you can pay for it (usually has some updates or exclusive content in the paid version) at the Chanimal Store. This is one of the most powerful Kits created–and attendees paid $299 just to attend the webinar session at SoftwareCEO where I first presented this! The video is also on YouTube (but not the rest of the kit).
OEM stands for Original Equipment Manufacturer, although the usage sounds a little unusual when used in a sentence. You can “OEM your product” to other vendors (ATI sells Dell video cards for use in their PCs), or you can OEM product from others (OEM a popular video codec to render Mpeg2 videos in your editing software).
Typically, OEM products are highly discounted within an OEM arrangement because of the potentially high volume. For example, at a software company, we OEM’ed our $99 3D software to Apple for $2.00 per machine. It doesn’t sound like much, but Apple purchased over one million copies per year. This amounted to two million dollars of profit (aside from the $1.00 for the CD-ROM and postage to deliver it (we also had no support costs, since the burden fell the Apple as part of the agreement). Assuming the company ran at a 40% pre-tax margin, the two million in profit would be equivalent to five million in sales–more than the overall revenue of the single product line.
Of course, there is always the debate over how much you would make in the same market if you were to sell them $99 copies. This is why some OEM products are either previous versions or missing some key features–the vendors are hoping to further increase sales by upgrading their OEM accounts.
Most agreements have a performance clause (although I’ve seen some bad agreements without them) that are tied to volume. You can see what an OEM agreement might look like for a white-label service sold through agencies by reviewing the sample at ReviewInc (note they have a referral (affiliate), reseller and white label agreements). The sample does not contain the actual terms since they may be unique to the account–but you can see a basic structure.
OEM vs White Label
Anything that uses another vendor’s technology within your own can be considered an OEM product. However, if the product is “labeled” as someone elses–it is also considered “White Labeled.” For example, your Dell laptop may have an Intel processor with the label “Intel Inside.” Dell does not make the processor (so Dell is the original equipment manufacturer (OEM)), and, in this case, leverages the Intel brand.
In contrast, your Dell laptop may have a Western Digital hard drive. Dell doesn’t re-label it as their own (if you open the laptop, the hard drive still says Western Digitial, so it is not white labeled (hiding the original vendors name as their own)). They may not leverage the OEM brand (may or may not mention it in the specs) unless it adds value.
We see this in other industries. For example, your car may ship with Michelin tires, a Bosh battery, and a JBL sound system. However, the JBL sound system may be the only component that the car vendor will promote (since it may sell more cars). Most lead-acid car batteries are supplied by Johnson Controls, Exide and East Penn–yet they are sold under white-label brands such as Interstate, WallMart, Sears DieHard, AutoZone DuraLast, SuperStart, and the list continues.
Should you white-label?
If your brand passes the acid test, “sells more product (your own or another product that uses your product brand) with vs without YOUR brand,” then the purchasing vendor typically doesn’t want to hide this brand (think, “Intel Inside”–your price might be 20% higher with Intel vs AMD). In addition, YOU may not gain brand equity (value: higher positive brand recognition–less price erosion (pay more for a Zest bar of soap than generic–that delta is the dollar value of the brand)).
I worked with one vendor that owned over 70% of the FAQ software market. Unfortunately, most of it was white label so they got dollars, but built no consumer brand equity for their own product. We changed the model to joint branding (“Powered by…”) which is what a majority of OEMs preferred. We would still offer white-label, but at a premium up-sell price (since we were losing our brand).
At another vendor, they saturated the market with their software that was sold by agencies. These groups could charge a lot more by using the software to perform the service for their clients–but white labeled it since they didn’t want their clients to know how they were doing it (or they could easily by-pass the agency since the software was doing over 90% of the real work–the agency was just doing the initial setup and forwarding automatic reports).
Your needs will vary according to your market dynamics and the competition–but in most cases, I recommend joint non-white label branding.
Additional OEM Resources
For additional OEM information, I would highly recommend you visit Stromian Technologies’ OEM Licensing Site. This site contains the Stromian’s OEM Software Licensing Guide which explains the ins and outs of software OEM licensing deals. In addition, it also contains the Open Source Software Licensing Page which contains information about how to establish an open-source agreement (i.e., Linux, etc.). The author also offers OEM consulting.