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The OEM Software Licensing Site
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On-line Resources:

Stromian's Guide to OEM Software Licensing

Stromian's Software Marketing Resources Page

Open Source Software Licensing Page


Consulting Services:

OEM Software Licensing, from Strategic Planning to Negotiations and Administration

Open Source Licensing Evaluation and Strategy

Windows-to-Linux Migration of Operations


























































On-line Resources:

Stromian's Guide to OEM Software Licensing

Stromian's Software Marketing Resources Page

Open Source Software Licensing Page


Consulting Services:

OEM Software Licensing, from Strategic Planning to Negotiations and Administration

Open Source Licensing Evaluation and Strategy

Windows-to-Linux Migration of Operations








































On-line Resources:

Stromian's Guide to OEM Software Licensing

Stromian's Software Marketing Resources Page

Open Source Software Licensing Page


Consulting Services:

OEM Software Licensing, from Strategic Planning to Negotiations and Administration

Open Source Licensing Evaluation and Strategy

Windows-to-Linux Migration of Operations



























































Stromian's OEM Software Licensing Guide

Donald K. Rosenberg, Stromian Technologies

OEM sales are widely known in the hardware world, but many companies, including software companies, are still unclear about software OEM licensing. The business model is similar to that of the hardware world, but is driven by the special pressures of the software industry.

Every day, software companies are hunting for ways to improve their software. Some are looking for ways to add functionality to their core products without taking the time to develop the functions in-house, or the risks that any software development project involves. Others are facing another release, and looking for new features to offer their users. They may or may not know about your software, and if they do know you, they may or may not approach you.

These software companies are not the only ones feeling the speed and technology pressures of the software industry--you are, too. While technology and the marketplace age your software, you are working to improve it and extend it, and you are also getting new products ready for the market. The life of any software product nowadays is only a year or two in its current form, and you must maximize the return on the development investment in that product in a very short time.

Your best case for the adoption of your software by a licensee is that the increased functionality will add more than enough customers to pay for the license fees. As long as the licensee believes that his customer wants your functionality, will absorb its cost in the price of the application, and that it is faster, cheaper, and more reliable to license an existing and proven product than to develop it in house, there is a path for OEM licensing.

This Guide is a Single Page Divided into Six Sections:

I. Why Should You License?
High Benefits/Cost Ratio
Increase Number of Channels
Prestige and Publicity
Product Improvement
Industrial Quality QA
New Features
Increase Market Presence
Increase and Identify Your Future Market
II. Who Should Try it?
III. What Should You Offer?
IV. When is OEM Licensing Appropriate?
V. Where?
VI. How is it Done?
Determine the Product
Determine the Market
Don't Forget Your Competitors
Early Approaches are Market Orientation
Approach the Prospects
Evaluation
Negotiation/Pricing
The Contract
What if They Want to Buy Me?
Don't Forget Support
What About Source Code?
OEM Licensing Consulting

Why Should You License?

High Benefits/Cost Ratio

Let's put the bottom line first--the OEM channel delivers higher returns for
investment than any other channel. Resellers, even if they pay you to join your partners program, require constant visits and shepherding to keep your product out there. The major distribution channels require payments from you and take a heavy percentage of the sales price, and a roll-out for a full marketing program for an end-user box product is a multi-million dollar undertaking. Even direct sales, in which you get to keep all the revenue, require mailings that typically cost $50 per order. Finally, all the sales made through resellers, distribution, and direct mail require individual tech support for every end-user.

OEM sales, on the other hand, require identification and targeting of the
limited number of software applications and vendors most likely to benefit from your software, the making of mutually beneficial arrangements with those firms, and technical support limited to dealing with their software engineers in support of your product. This work is done largely on the telephone and with some visiting. The result is a steady and--we hope--growing revenue stream.


Increase Number of Channels

OEM licensing is one more channel to add to your other distribution methods.
A certain amount of conflict among channels is inevitable, although careful planning will minimize it. Similarly, OEM licensing need not conflict with your other channels, but can actually help build sales in them by giving a broader number of users a taste for your product, and then offering these users upgrades.


Prestige and Publicity

It is harder to quantify the substantial benefit a product receives when it
is associated with market leaders. You will want to make joint press announcements with your licensee firm for every deal you make. Your goal is to become a standard, so that your product goes from being the odd choice to becoming the obvious choice.


Product Improvement

Industrial Quality QA

Random end-users can't begin to do the job of testing your released product
the way a group of OEM licensee software engineers can. Even after the evaluation and testing stage is over and your product is adopted, the dynamics of the software business force the licensee to push your software to the limit. Your licensee is building your product into new, cutting-edge technology and forcing it to do things ordinary users will not ask it to do. Your product will never be pushed harder than by your OEM licensees. Their hammering will substantially increase the robustness and quality of your product.

New Features

Those OEM licensee engineers may ask you for new features or improvements to
the product--listen carefully. If you believe the change will improve your standard product, then agree to a schedule with the licensee for making the change. You will then have a new feature for all your users in your next release. If you believe the change would benefit only the one licensee, and be expensive to make, offer to make the change in return for a fee, and retain the right to adopt the change in your product later on, if you think the market warrants it.


Increase Market Presence

Your goal is to make your technology dominant in the marketplace. You want
it spread as widely as possible in order to establish a strong market position. The first step is doing your best to see that every box of your licensee's product contains your product. The next step is putting your product inside as many other products as possible. The most aggressive stance is to give it away, like Netscape. A less aggressive but useful stance is not to overlook the little deals. In the early stages of OEM licensing you are going for quantity as well as quality of your list of licensees. Eventually you will be lending your prestige to the little deals, and more people will seek to do business with you.


Increase and Identify Your Future Market

If your product is inside some else's application, you need to find the
end-user so that you can offer the full version of your product, as well as other products. You will need to be flexible here. Will your OEM licensee put your upgrade coupon in every box he ships? Will he give you the customer lists of buyers who are getting your software in his product? Will he at least let you mail to that list, using a mailing firm?

The best deal is to get the customer list--the people on it are known to be
buyers of a certain type of software. When you possess the list you can mail to it when you choose, and you will be building up your own mailing list, a valuable property in any business. If your OEM licensee is large and won't give you all the customer's names, then offer to trade your list against his list, name for name.

When you mail to these names, offer them a generous opportunity to upgrade
to your full product, since they are already users. And if they are not currently using the features you supply to the licensee product, your letter may supply the information needed to awaken their interest in trying it out. This is one more nudge along the road to making them full customers.

Who Should Try it?

Any software firm seeking to gain the maximum leverage on its resources.
Flexibility and creativity count. Although you need to be quick to respond and energetic to make things happen, you will need patience to make it through a long sales cycle. Six to eight months is typical, and a large company may take over a year. The most important time-determining factor is the prospect's release cycle: your product needs to be considered while features and budgeting are being determined for the next release. As the prospect moves down the release cycle, he will have less time and fewer resources to devote to evaluating or incorporating your product.

What Should You Offer?

Basically, you should be offering a core version of your product, with
limited functionality to prevent channel conflict with your full-featured product. Ideally this core functionality will work as a feature inside the licensee's product, and the end-user will not be able to access all the functions and features of your full product as sold in the box. This core functionality could be offered to the licensee with the necessary hooks or API to enable easy integration into the licensee's product. But as with the other aspects of OEM arrangements, there are unlimited ways to combine your product into another product. Your licensee might simply drop your disks and manual inside his box, and in some cases that box might even contain a hardware product, such as a computer or a modem, instead of a software product.

When is OEM Licensing Appropriate?

OEM Licensing is appropriate at any stage of the product life cycle.

In the case of established technology, there may be system-level functions
that would be useful in many products. The longevity of the technology is a warrant for its dependability.

If a product is rapidly becoming a hot technology, it is likely that other
products will want to include a version of it in their box to add obvious value to their own products.

Even technology in its early stages is a candidate for OEM licensing. It is
possible to interest a larger company in a product and have them help fund the new product and company through large advances and license fees. Sometimes this help is intended to put the licensee in a favorable position to buy your company if the product succeeds.

"NOW" is your strongest selling card--your
technology is working NOW and available NOW to licensees.

Where?

Since a startup technology product has to look at the world market, there
is no reason OEM licensing can't go abroad as well. It is perfectly possible to negotiate OEM licenses over the telephone, even when the other party is on another continent.

How is it Done?

Determine the Product

See What Should You Offer? above.


Determine the Market

You have a good idea where to begin. What products need your functionality?
Go to an on-line data source, such as Computer Select, and read about products by name and category. Study the reviews and look for the names of people associated with the products. Is anyone else licensing this functionality?

Don't Forget Your Competitors

Depending on the overlap of your products, you may very well be able to
license technology to people who might think of themselves as your competitors. You might as well make money on the sales of other packages besides your own.

Early Approaches are Market Orientation

Probe the lines before going all out. Approach some smaller prospects to
test your market support (are the literature packages, FAXes, demo disks sent out smoothly in response to requests?) and prospect response. What do prospects see as their potential use for the product? What you learn will help refine your approach.


Approach the Prospects

You will need to work two lines at the company: marketing and technical.
Both departments need to satisfy themselves that your software is what it says it is, and that their customers will want it and be willing pay for it. In your early efforts you may encounter the Not Invented Here prejudice, but the day may come when everyone sees your product as the obvious answer to a problem, and developers will use it rather than try to invent their own.


Evaluation

This is a difficult stage to get through. You want the prospect to commit
scarce resources to testing and evaluating your product, and you want a favorable evaluation at the end. Sending out time-limited evaluation copies will help push the process along when the prospect shows a natural tendency to put off the testing for another week or two while more pressing problems are dealt with.


Negotiation/Pricing

Give careful thought to pricing, since you will have to speak first. Your
price is based on the degree of functionality you add to the product, and what the licensee is willing to pay. Being in every box of the licensee's product will give both of you more benefits than being in an add-on product that sells only some of the time, so structure your terms accordingly.

Consider also whether your license will include new versions of your
product, added platforms as your product migrates across them, and which of his products your licensee is allowed to use your software in.

Although you will have a clear and simple picture of how you expect the
licensing arrangement to function, and will show this picture to the prospect, you will discover that you never do the same licensing deal twice. You are looking for the simplest way to split off a royalty stream from your licensee's revenue stream, and the point and manner of dividing this stream will depend on your licensee's distribution model. A complicated, modular product will likely require a correspondingly complicated royalty arrangement. Your ideal may be a flat price or a percentage, and based on boxes sold or users, but you will find endless ways of counting and calculating, including seats, servers, sites, and one-time or annual fees. As the licensee's business changes over time, you may find it necessary to make changes in the agreement.

You will want immediate revenue, and your licensee will not want to pay
until product has been sold. You may want to ask for upfront money in the form of advance royalties. In some cases your licensee may be willing to pay an advance, but his accountants might want you both to call it something other than an advance. In that case you can try an initial licensing fee, NRE funding, or some other payment that will satisfy both parties and the accountants. Remember that you will need upfront money to underwrite the tech support you will offer the licensee during his development period.

The Contract

This is not the place for legal advice, and a discussion of all the issues
in contracts would take up many pages. Use your own contract, from your attorney, arranged in such a way that the business terms can be summarized on a page at the end of the document.

Settle the business terms with the licensee before producing a contract.
While the terms themselves and the document that embodies them are confidential, and should be marked as such, the relationship is an important point to publicize, so put something in the contract about joint publicity. Some firms will in fact forbid you to publicize the relationship without their permission, but this is rare. Include the terms of joint marketing efforts (such as mailing lists, coupons, etc.), and make sure your rights in your software and trademarks are fully protected (the licensee should display your copyright and patent information in every place that his information appears).

At the end of the day you may have to struggle with corporate attorneys who
want to rewrite the terms that you and your business contact at the licensee have already settled. Use your new ally as leverage in this situation.

What if They Want to Buy Me?

Listen carefully to the offer--you don't have to sell. Under some
accounting circumstances, a company may receive more financial benefit from buying you than by either licensing your software or developing it themselves.


Don't Forget Support

Remember that although you don't have to support all those end-users who
will soon be introduced to your product, you have to support the engineering efforts of your licensee as he integrates your product. You will need to specify clearly the standards of support and time limits, as well as the cost for support beyond those limits.


What About Source Code?

Source code is bound to come up, particularly in your earlier transactions.
The best way generally to handle requests for source code is to agree to an escrow arrangement, and then charge the licensee suitable initiation and annual fees for the service. Be sure the contact and escrow conditions specify that royalties will still be paid even if the licensee obtains the source code from escrow, and that once the conditions that triggered the delivery of source code from escrow have been rectified, that the code is to be returned to escrow.

Under certain circumstances you can part with source code, provided your
contract properly protects your rights in it, and the licensee has a non-exclusive license with no right to license it further, or to use it in any manner but that clearly specified in your agreement. Parting with the source code in a series of non-exclusive arrangements and for a suitable flat payment may make excellent sense for technology that is not at the center of your business. You will have immediate cash, the possibility of making other deals, and no support or royalty collection burden.

OEM Licensing Consulting

If you need further help with OEM software licensing, Stromian Technologies offers market analysis for your product, partner identification and contact, and negotiations. Use this address

info@stromian.com
to send me a note about your product and your plans


Contact Stromian Technologies at
info@stromian.com
or call (919) 687-4172 or FAX (919) 688-7210.

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