A company’s brand is absolutely crucial to its business development and success. Particularly where a company provides products or services to consumers, its brand is often the greatest intangible asset it has. A brand can be much more than just a registered trade mark: it encapsulates all the values and messages about the business for customers. For that reason, when a company then considers expansion which involves the licensing of that brand, this is not something to be taken lightly, but a business activity that needs to be carefully thought through and well negotiated in a detailed licence agreement.
So why do corporations license their brands if they are so precious? Why would they risk placing their most unique, and often most valuable, asset in the hands of a third party?
Good things come to those who share
According to the Licensing Industry Merchandisers’ Association (LIMA) 2nd Annual Global Licensing Industry Survey, retail sales of licensed merchandise reached $251.7 billion in 2015. This is an impressive number, especially considering it is a conservative estimate as it does not include the large number of licensing agreements that are not associated with merchandised products. So the most obvious reason that corporations license their brands is to generate revenue from guaranteed royalty payments, thereby increasing the value of their brands and directly increasing their bottom line.
The Hasbro licence relating to the MONOPOLY brand with McDonald’s is a good example of how licence agreements can assist in increasing sales and, in this instance, revive a brand. During the 1990s, board game sales were flat-lining and declining, as kids were more interested in faster-paced video games. After a licensing deal with McDonald’s, Hasbro benefitted from both an exponential increase in the sale of the MONOPOLY board game and royalty revenue from McDonald’s for the use of the brand.
Tactical sales support
While brand licensing provides obvious financial and strategic advantages to IP owners, it can also be viewed as a tactical marketing tool to support sales related to a core business. IP licensing enables businesses to achieve long-term sustainable revenue growth by building brand capital, expanding markets, supporting key sales, increasing brand awareness and re-enforcing brand image. These secondary functions of IP licensing strategies help drive core business profit centres in the long term.
Business expansion with a fraction of the risk
Extending product and service offering into new categories and lines of business is another reason corporations license their IP. Through licensing strategies, a corporation can avoid the major investments, high capital expenditure and risks associated with starting a new line of business while maintaining control over their brand image and benefiting from additional revenue and brand exposure. Such deals enable the licensor to gain the licensees’ expertise in the new line of product without having to go through a steep learning curve.
According to Bloomberg, the most recent Star Wars movie “The Force Awakens” was predicted to produce $9.6 billion in revenue from worldwide ticket sales, merchandise, and home entertainment within the first year of release. Of this revenue, $5 billion was predicted to flow from Star Wars merchandise.
New international doors can be opened
Licensing provides corporations with access to new geographic markets and local expertise which may otherwise be inaccessible and harder to penetrate. The licensee is also able to assist with local regulations and adaptations necessary to enable the licensor to enter the foreign market in question. This decreases the time, fees and regulatory burdens associated with a new geographic expansion. Also, don’t underestimate the value of local knowledge that a licensee can bring to an international expansion.
There are many examples where a brand owner simply taking a model which works in one market and imposing it in a different market has resulted in failure. Take Tesco’s FRESH’N’EASY retail outlets in the USA: Tesco did not study sufficiently the differences in local customer buying habits. Prominently displaying “Best Before” dates on the packaging sent a message not of freshness, but the opposite to US consumers: they took this to mean the product was close to its expiration date and therefore likely to be stale.
Market share can grow as IP reach grows
Properly constructed licensing deals between two high profile parties can significantly increase the market profile of a brand. One of the most significant examples is the cross-licensing agreement between Google and Samsung that covers existing patents and those that may be filed in the future by the parties. According to a statement released by Samsung; this deal “paves the way for deeper collaboration on research and development of current and future products and technologies”.
Policing your IP rights
A less obvious benefit to licensing is the ability of licensees to assist brand owners with monitoring and enforcing their IP in a number of territories and markets. Licensees have a vested interest in maintaining brand integrity and IP rights, identifying unauthorised use and infringement which the brand owner may not otherwise have knowledge of in a timely manner and therefore enabling them to take action for the benefit of both licensor and licensee.
The authors are members of the IAM Team:
Ben Goodger (Osborne Clarke)
Ralph Thomas (DSM)
Mena Lo (Wilkinson & Grist)
Bahia Alyafi (Alyafi IP)
Issue 070
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