June 14, 2022
A successful business is built on successful products and services. When profitability through a competitive edge in the marketplace is the goal, collaborating with others to leverage their expertise and intellectual property (IP) can be a useful complement to one’s own knowledge. As discussed in my previous blog post, such collaboration can be achieved through open innovation or through licensing IP.
Innovation is always needed in a competitive marketplace, but innovation efforts, particularly those that are outside a company’s areas of expertise, can be expensive, time consuming and carry no guarantee of success. Going outside the organization for complementary expertise or already-developed technology can provide a significant head start.
Licensing IP allows an organization to acquire knowledge from another entity as a shortcut to innovation. To improve sales, a business can hire staff and invest in years of research, or it can seek help from an outside entity that has already protected the required knowledge. The company gets permission to use the entity’s IP and typically pays a royalty based on sales attributable to it. The organization can cut years from its product development cycle and gain a head start on the competition because it has access to knowledge its competitors do not.
An IP license can be a full license, or it can be limited by exclusions or restrictions. A license can limit the organization to using the information only in association with a given product type (such as automobiles but not construction equipment), a given market (such as hospitals but not schools) or a given channel (such as business-to-business but not consumer retail), among others. The license can be limited in time, to the lifetime of a licensed patent or to a certain geographical region.
An IP license can also be exclusive or nonexclusive and include requirements for upfront payments, royalty rates, annual minimum sales, annual minimum royalty payments, regulatory filings, reputation protection, advertising and marketing. Failure of the company to meet requirements can result in an exclusive license becoming a nonexclusive license or in a license being terminated.
When or why would a company license its IP to an outside entity? In some cases, the business owns intellectual property it no longer values and will decide to either sell or license that knowledge as an additional income stream. In a related example, the company might decide it does not have the capacity to expand into additional geographical regions and can license its IP to another entity that does. Under such a plan, the organization will make money on its own sales as well as the sales of an erstwhile competitor.
Just as a company can license IP from more than one outside entity, it can license it to more than one outside entity, provided such licenses are nonexclusive and compatible by geographical region, product, market and channel.
The ability to license IP in or out provides an additional level of flexibility in innovation and working with outside entities. There is little practical difference between owning IP and having an exclusive license to such property. A structured license agreement allows both parties to benefit from the IP, one in in terms of innovation and the other in terms of income. Licensing IP enables an organization to commercialize a higher margin product, increase speed to market, obtain a larger share of innovation in its categories and improve access to outside skills and resources, all important considerations in the competitive marketplaces of today.