No sex before marriage in EDA

In most businesses, every company doesn’t feel the need to make every product that it sells. When you buy a car from General Motors, they don’t make the ABS system themselves, they buy it from Delphi or from Bosch. When DEC came out with the Vax, they didn’t feel the need to make their own graphics terminals, they bought them from Tektronix and re-badged them.

This is known as an OEM deal. OEM stands for “original equipment manufacturer” and refers to the fact that General Motors is the manufacturer of the original equipment (the car) and the other parts are treated by regulation as if GM had made them themselves. Indeed, they may even badge the part with their own logo and make it hard to find out just who is the real manufacturer.

OEM in other industries has come simply to mean re-selling stuff created by another company. In EDA software, for example, almost everyone’s schematic viewer is actually a product from Concept Engineering in Germany.

But this sort of deal, where a component of the product is incorporated from an external company, seems to be the only sort of OEM deal that works. Once the deal moves up to the level of a whole tool then OEM deals almost never work in EDA. There seem to be two reasons for this, one on the customer side and one on the vendor side.

On the customer side, if you are buying a product from bigEDA and you know that it really comes from littleEDA, then why would you not want to deal with littleEDA directly? If you have a problem, you know that bigEDA is just going to pass the question onto littleEDA anyway, and even before you buy it there may be some channel conflict when both bigEDA and littleEDA are competing for your business, and for sure the littleEDA sales team knows much more about the product. It just doesn’t make too much sense to flow your dollars to littleEDA through bigEDA, and flow their support back through the bigEDA support channel.

On the vendor side, bigEDA wants to do big deals with their major customers. They’ll give you all your EDA software, or a good part of it, for all your EDA budget, or a good part of it. OEM deals usually require a per license payment from bigEDA to littleEDA but that doesn’t fit well with a deal where technically the semiconductor company may be getting unlimited or a large number of licenses for a bundled sum. There is simply no way to calculate an appropriate number of license fees to pay littleEDA, and the need to do so makes the deal more complex and so the salesperson simply drops the OEM product as not worth the usually minimal increment in bookings.

Finally, there is a strategic reason that makes OEM deals unattractive. You’d think that an OEM deal would be sex before marriage. If the deal works well then bigEDA can buy smallEDA. The trouble is, if the deal works well then another big EDA company might make a move. And either way, bigEDA is going to have pushed up the price of smallEDA and is going to have to buy back their own revenue. There’s no sex before marriage in EDA. If smallEDA is the right company then marry them immediately before they get more expensive.