An IP management strategy enables companies to protect their innovations thanks to patents or industrial designs registration. This strategy gives them the tools to prevent third parties to copy and exploit their innovation without the IP owner’s agreement. Therefore, IPs are treated like assets by companies and investors.
One of the options to exploit commercially those assets is to use a Licensing strategy.
What is Licensing?
Licensing is a business arrangement in which one company gives another company permission to manufacture its product for a specified payment (https://www.entrepreneur.com/encyclopedia/licensing).
We can compare it to the idea of renting somebody’s idea to market a product. Licensing is a business relationship based on mutual trust and partnership. The actors of this partnership are:
- The licensor is the IP owner.
- The licensee is the company which has been given the right to exploit the IP against a payment for its use.
Licensing Pros & Cons
Both partners must benefit from this agreement to reach a win-win situation. Let’s review the pros and cons of this strategy.
From the licensor’s point of view
- Thriving an innovation culture
- Faster entry to the targeted markets
- Access to a global market with limited resources
- Operational costs reduction thanks to the product development made by the licensee (R&D, manufacturing, marketing, business development and operations)
- Any issues with the final products manufactured by the licensee are under the licensee’s responsibility.
- Loss of control over the products’ R&D, manufacturing, operating, marketing and business development processes
The risks of contracting with an unreliable licensee can provoke:
- The partnership resiliation and the end of the income flowing from this activity
- Financial loss caused by the non-respect of licence agreement provisions or by the inaccurate reporting of products sold by the licensee
- IP infringement risks
- Negative impact on the licensor’s corporate image in the event of an absence of alignment with the partners’ values. Company value and customer loyalty will be damaged and cause market share and profit losses.
From the licensee’s point of view
- Immediate access to large portfolios of IPs to grab business opportunities
- Agility in the licensee’s innovation strategy thanks to those existing external IP portfolios
- Dependence on third-party IPs
- Cost of using third-party IPs
The backbone of a Licensing strategy is the licence agreement because it describes the rights and duties of the business partners. The process from the negotiations to closing the deal will help them to build a lasting partnership based on trust. It will enable clearing up disagreements and/or misunderstanding and will help to meet a common vision of the Licensing Strategy.
The contract must consider the different partners cultures to ensure that it will be implemented effectively. However, some clauses are a must-have, as follows:
- Should the contract offer exclusivity or non-exclusivity of product distribution to the licensee?
- Which territory does the licence agreement cover?
- How to effectively clarify licensing revenue calculation in licence agreement?
- How to get out of an unprofitable licensing partnership?
- How to deal with product improvements made by the licensee?
- How to apply a rigorous control over the licensee’s compliance to the licence agreement?
Let’s consider an example of a successful Licensing strategy. Around 1.5 billion smartphones have been sold worldwide in 2018. Each of them is using licensed technologies (for example,the technology behind the chips in the semiconductor industry). This pattern can be replicated for any innovative technologies.