O.E.M. is the acronym for Original Equipment Manufacturer. An O.E.M. agreement is a way for a manufacturer to integrate a component from another manufacturer into his equipment, and to sell the complete equipment under his own brand. This concept was originally used in the hardware industry (for example, for monitor screens, network interface cards, etc.). It soon gained a larger acceptance and is now also used for software components.
It essentially consists in re-branding a software product from a vendor (we will call him vendor A) to be sold by another vendor (we will call him vendor B) under his own brand—as if vendor B developed the software. Most of the time, vendor B will integrate the O.E.M. software into a larger set of products—but this is not always the case. Usually, vendor B offers products or solutions that complement vendor A's product. Vendor B pays royalties to vendor A—either a percentage of sales, or a fixed price per unit sold, with a minimum monthly or quarterly amount.
So what are the advantages of an O.E.M. agreement, and why would you want to choose this way of selling your software?
The O.E.M. model is a lot stronger than a classical distribution agreement. Some vendors don't want to be seen as distributors and this model gives them the opportunity to sell your software under their brand. It usually requires a stronger commitment from your partner, as there are some significant costs associated with the re-branding (graphical interface changes, documentation reformatting, marketing materials, etc.), and most O.E.M. agreements include a minimum royalties amount, which motivates your partner to sell the product. An O.E.M. agreement usually means that your partner will ramp up his sales more quickly and thus will generate more revenue for you than in a traditional distribution model.
There is a major downside to the O.E.M. approach, however. Since your product is not sold under your brand name, you are not building brand awareness. This may be fine if you decide you want to stick with the O.E.M. model exclusively, and do not expect to sell your product directly. But if you choose the O.E.M. model as a quick way to penetrate a market, be aware that it can bring you an important revenue stream quickly, but it won't help you when you start to build your direct sales force. Usually, the discount offered on software with an O.E.M. agreement is higher than the one with a distribution agreement and can reach 60 to 70% off the regular list price.