Licensing involves granting someone else the legal right to use a specific intellectual property while retaining ownership of the IP itself. The licensor (the owner of the IP) and the licensee (the party obtaining the license) enter into a contractual agreement that outlines the terms and conditions of use, including the duration, territory, and permitted activities.
Licensing can cover a wide range of IP assets, including:
- Trademarks: Licensing a trademark allows another party to use the registered brand name, logo, or other distinctive symbols associated with a product or service.
- Patents: Patent licensing grants the licensee the right to produce, use, or sell an invention protected by a patent.
- Copyrights: Licensing copyrights allows the licensee to reproduce, distribute, or display creative works, such as music, literature, or artwork.
- Trade secrets: Licensing trade secrets involves sharing confidential business information, manufacturing processes, or formulas with the licensee while ensuring its confidentiality.
How Licensing Revenue Works
Licensing agreements are ubiquitous in many industries. For example, companies that use computer software for their daily business operations must typically enter into licensing agreements with the copyright holders of the software. Franchises must license the products they sell as well as the branding and marketing materials from the parent organization. Musical performances of other artists’ material must also be licensed if it earns income.
Licensing revenues are a significant source of revenue for several publicly traded companies. For example, a major source of income for the publicly traded company Dolby Laboratories is the licensing of its technology to consumer electronics manufacturers such as DVD player manufacturers.
Other groups that rely on licensing revenues are the National Basketball Association, National Football League, National Hockey League, and Major League Baseball. These organizations grant permission to third parties, such as apparel vendors, to use teams’ logos in video games, on clothing, and on other merchandise. The vendor keeps part of the profit for its role in producing and selling the apparel, but the sports association also earns money in exchange for granting the vendors the right to use the teams’ logos. In 2010, the MLB sold licensed merchandise worth approximately $2.75 billion.
Understanding Licensing Agreements
Licensing agreements delineate the terms under which one party may use property owned by another party. While the properties in question can include a myriad of items, including real estate holdings and personal possessions, licensing agreements are most often used for intellectual property, such as patents and trademarks, as well as copyrights for written materials and visual art.
Licensing agreements are widely used for the commercialization of technologies invented by universities or government labs. In addition to detailing all parties involved, licensing agreements to specify in granular detail, the ways in which licensed parties may use properties, including the following parameters:
- The geographical regions within which the property may be utilized.
- The time period parties are allotted to use the property.
- The exclusivity or non-exclusivity of a given arrangement.
Scaling terms, such that new royalty fees will be incurred if the property is reused a certain number of times. For example, a book publisher may enter a licensing agreement with another party to use a piece of artwork on the hardcover editions of a book, but not on the covers of subsequent paperback issuances. The publisher may also be restricted from using the artistic image in certain advertising campaigns.
Licensing offers individuals and businesses a pathway to monetize their intellectual property and maximize the value of their assets. Whether through royalties, upfront fees, minimum guarantees, cross-licensing, franchising, or brand extensions, licensing provides opportunities to generate income while retaining ownership of valuable IP. By understanding the different ways to make money from a license, licensors can strategically leverage their IP assets to create mutually beneficial partnerships and unlock the full potential of their intellectual property.