Everything You Need to Know About OEM Software Licensing

What is OEM Software?

In laymen terms, an OEM Software Vendor will licenses their software to another hardware or software vendor (Vendor 2), who in turn, distributes a packaged product or bundle to a customer. An example of OEM software would be applications that come pre-installed on a cellphone. Another example might be a Software development company that sells an SDK for another software company which uses the SDK to develop a feature that is used in an application, which is in turn sold to customers.

An original equipment manufacturer, or OEM, is traditionally defined as a company whose goods are used as components in the products of another company, which then sells the finished item to users. The company that uses these components to complete a finished product is known as a value-added reseller, or VAR. This relationship is common within the computer industry since manufacturers put together computers made of other companies’ parts and then sell the product under its brand name.

This dynamic is also common within software products, such as when a software vendor develops an SDK that is used as a component in another software vendor’s application which is distributed to end-users. Another software-related example could be if a software vendor develops software that comes pre-installed on a computer.

Definition of OEM Licensing:

OEM licensing is when a company (the OEM or the Original Equipment Manufacturer) provides licenses to another company to use their product within the latter company's product. With an OEM license, the end-user gets more features, while the OEM is able to reach more customers and the licensee is able to add more value to their product. We wrote a blog post about different types of license agreements, including OEM.

Advantages of OEM Licensing:

• OEM licensing allows the OEM to get their product into a whole new customer base with minimal cost of customer acquisition, making OEM licensing an attractive option for small companies to gain exposure.
• Working with globally known brands can help companies showcase the value of their product and bring them more credibility.
• VARs can find that packaging their products with OEM software can make them more useful to their customers, while being able to negotiate the software licensing costs up front allows them to better predict their cost structures for a product launch.

Disadvantages of OEM Licensing:

• In some cases, the Software OEM might surrender a large customer base. This would depend on the licensing agreement, but if a specific functionality is already a part of the software they’re using, the end-user is not likely to buy another software.
• Given the agreements between OEMs and VARs, the OEM may sometimes earn less per license than if they sold directly to consumer.
  

OEM License Vs End-User Licenses:

In a traditional end-user license agreement, the end-user receives the license. However, with an OEM, the VAR is received by another party before it is distributed to the end-user.

If a software vendor developed their application and sold it directly to end-users, the end-user would receive the license directly. If this same software vendor developed an SDK with identical functionality to the previous application except sold it to a VAR to use within their applications, the VAR would receive the license.

Common OEM Software License Models:

There are a few common OEM Software License Models:

• Node-Locked Licensing binding the software to the device, where the VAR simply pays a fixed rate for each machine / device that was sold. For example, Windows preinstalled on a new laptop sold by Dell. This is also known as "per app installation"
• Trial software pre-installed on machines is also a common approach. The OEM may agree to a revenue share agreement with the VAR in the event that the end user completes a purchase.
• OEMs sometimes License their SDKs per developer using the SDK. This mechanism may or may not include a limit on the number of apps as well as number of products that can be licensed to end users. per developer licensing may or may not include royalty fees on the apps distributed as well.

How are OEM Licenses Enforced?

Typically, OEM licenses are enforced using license agreements used in conjunction with audit clauses. An audit clause allows for the right to audit, giving one party authority to review the other party's records, as they support the obligations to comply with the contract. This is not the only way, however, software licensing tools such as LicenseSpring can also enforce OEM licenses. LicenseSpring can node-lock software to a device, effectively making it pre-licensed since it is shipped with software pre-installed on it.