August - 1999 - issue > View From the Top

The mobile market, consisting of laptop computers, hand-held devices and a host of other peripherals, is large and complex. Personal computer manufacturers, like Dell, Compaq and Toshiba (sometimes referred to as OEMS — Original Equipment Manufacturers), compete fiercely for mobile customers in a market driven by price-cutting, discounting, reseller relationships and outsourced manufacturing. Introduce into this an emerging demand for mobile digital video solutions such as DVD playback, video teleconferencing and you have a revolution on your hands — a revolution that we at MARGI Systems have made our mission. Our flagship product is DVD-To-Go, a plug-and-play PCMCIA card, that transforms laptop computers into full-featured DVD players with Dolby Digital Surround sound.
OEM Partnering: Rules, Caveats, Truths
Relationships with laptop vendors was critical to an emerging technology company like MARGI. Unlike the retail market, which is slow to embrace new technology, OEMs are the first to adopt new PC peripherals such as Zoomed Video cards. OEMs create the first set of sales channels for the products to reach the market. The high volume nature of OEM transactions mandates cost efficiencies and quality control in production, resulting in lower costs and higher quality for retail buyers. The OEM relationship also provides credibility and acceptance of new technology in the corporate world. Also, OEMs usually pay within 30 to 45 days from the time of accepting the inventory while the retail distribution will usually do that in 180 days. Finally, OEMs are also your best advocate, your strategic advisers and sometimes your financiers as well.

That said, creating and maintaining an OEM relationship is hardly an easy task. OEMs often have unique requirements, stringent standards and are not averse to exerting pressure to achieve their business goals. Here are some OEM pointers we’ve picked up along the way.

Rule 1: Marketing counts as much as great technology.MARGI’s first product, MPEG-to-Go, a Zoomed-Video (ZV) PCMCIA card, was launched in 1996. An industry first, MPEG-to-Go received critical acclaim because Cirrus Logic and other members of the PCMCIA standards committee used it as the benchmark for the ZV standard. Although we assumed that our superior technology was a sure winner, the story in the market was quite different. A much bigger competitor of ours, Sigma Designs, was running away with laptop OEM deals and card manufacturing relationships because of their marketing muscle and pre-existing relationships.

Rule 2: The "chasm" factor — get early adopters and work like hell to keep ‘em.In the OEM relationship business, you’ll find three types of companies: Those that like you, those that dislike you and those that are undecided. There’s not much you can do about the first two. The leverage is in swinging those in the third category in your favor. Once we learned Rule 1, we selected one or two OEMs who were favorable toward us to get our products qualified and then do everything in our power to keep the customer relationship going. MARGI won over Texas Instruments in the US and Acer in Taiwan. This was a watershed moment for MARGI because two name-brand laptop makers had decided to select a relatively obscure company over the established market leader.

Rule 3: Marketing alone can’t keep you going; you need great technology to back it up. While seemingly the opposite of the first rule, this rule is actually complementary to it. What happened in 1996 was quite dramatic. All the OEMs who chose our competitor, Sigma Design, were having problems with their card. Sigma was struggling to support all the OEMs all at once — all except Texas Instruments and Acer, that is, who had no problems at all. That was our time to shine; our technology was better.

Rule 4: Partnering — it’s not about your success alone. Our competitor had established manufacturing relationships with too many vendors, who were now competing against each other on price when supplying to the same OEM. Many vendors incurred serious financial losses as a result of the price war. We learned a valuable lesson from their mistakes: It’s not enough that we alone are successful. The key to a good partnership is helping our OEMs, suppliers and manufacturers become successful as well.

Rule 5: Learn the rules of the game.In our early stages, we received a Request For Quote from Compaq. Acting upon the assumption that our superior technology allowed us to charge a premium, we priced ourselves significantly above our competitors. Halfway through, when we researched our competitor’s prices, we immediately changed to a lowball strategy. Quality is important, but pricing is key to OEM decisions. While Compaq liked our technology, they were singularly unimpressed with the flip-flop in our pricing. We lost the deal.

Rule 6: Fear, uncertainty, doubt — use it to your advantage!MARGI continued to expand its product line by expanding into video capture cards (TVs, camcorders, laser disks) and video conferencing cards. The turning point came when MARGI first introduced its DVD decoder card. At that time, the general perception of OEM manufacturers was that it wasn’t possible to create a PCMCIA-compatible DVD decoder card. OEMs forecasted a redesign of laptops in order to accommodate PCI DVD decoder cards requiring pre-installation at the time of manufacture – an expensive and time consuming proposition. Within a month of launch, MARGI had convinced 85 percent of the Taiwanese laptop makers to switch their internal cards strategy to a PCMCIA strategy based on MARGI products.

Rule 7: Divide and conquer. Colonial England used this policy effectively to conquer new territories. The same principle can be applied when dealing with large corporate OEMs. MARGI was invited to the laptop division of a large computer maker and was informed that they were evaluating other card suppliers as well. We later learned that the other supplier was really an internal program that was competing against our product and we were brought in to give it an aura of impartial vendor selection. Knowing that the internal program had limited success with its product, we raised the stakes by offering the company zero inventory costs, total support and guaranteed compatibility on their entire product line. We won the deal. The internal card program was scrapped soon after.

Rule 8: Focus on your core competency; don’t "di-worse-sify." Since we didn’t have any resources of our own early on, we needed every resource that our partnerships could provide in order to sustain us. When LSI Logic licensed our chip, it was a golden opportunity for us to market our products to a wide distribution network around the world. We traded off revenue for marketing in the LSI Logic deal so that we could focus on perfecting the technology and allow LSI to focus on the manufacturing, distribution and financing aspects.

Rule 9: One good partnership breeds more good partnerships. Based on the strength of the LSI relationship, Dell signed up with MARGI within two months. This was yet another cornerstone in the OEM relationship. Dell is renowned in the industry for making safe and effective choices for its product line partnerships, and is also notorious for being extremely cost-conscious. Immediately, the rest of the industry followed suit. The rest of 1998 was spent in perfecting this technology on other OEM laptops.

Rule 10: Branding is key. After producing two versions of our PCMCIA cards, we felt that MARGI had proven itself as a high-quality card maker. We made the decision to start branding our third-generation DVD cards with the MARGI name, instead of using the laptop manufacturers’ brand name. After some initial opposition, the laptop makers agreed to the idea because we convinced them that their own internal qualification process and licensing associated with DVD would delay their program sufficiently so as to be of no use. Today all our cards proudly carry the MARGI logo.Today, the mobile digital video market looks very promising with the advent of high definition television, the convergence of video, high-bandwidth Internet and hand-held devices. OEMs provide a company like MARGI an 18-month window into the future as to which technologies are going to be integrated into laptops and which will remain as peripherals. Whatever the technology the future brings, it is critical to be at the convergence of these technologies and partnering with the leading OEM vendors to give customers leading-edge technology solutions. Creating a common code thread base that provides different functionalities akin to creating different hardware cores, is essential to tremendously shortening product development cycles for growing technology companies.