There is no silver bullet or set of formulae on how to identify licensing deal partners, then negotiate a licensing arrangement, and finally close the deal! Every deal stands on its own, and a licensing executive must be creative, flexible, and knowledgeable about the technology or invention he/she is licensing as well as about the people and the company he/she is dealing with. And, just as important, he/she needs to use that creativity to find the best deals for the company.
The first question always is what can we license? Well, there is a wide range of intellectual assets, including: product technology; processes such as manufacturing, CAD/CAE/CAM software, and testing equipment and procedures; and business methods.
Then, there always is the question of why should I license out my valuable IP and technologies. And, again, there are several reasons, principally to:
- Generate new sources of royalty revenue
- Manage and resolve threats
- Reduce the cost to acquire new technologies; e.g., through:
- Joint developments
- Joint ventures
- Gather competitive intelligence through negotiations
- Deter government anti-trust-actions
- Enter new markets economically--versus setting up a company, etc.
- Use Your IP as collateral for loans
- Negotiate pre-paid royalties to generate an early cash flow to support development and new IP
- Increase the reputation and goodwill for the company.
But the number one reason to license out or otherwise commercialize IP and technologies is as Jerry Maguire said in the movie “SHOW ME THE MONEY”:
To do this, the IP and technology commercialization plan usually includes licensing out the rights to selected non-competing firms. In this article, I would like to propose a “counterintuitive” concept—i.e., licensing to competitors. But there is a key caveat. You should not do so until your company has established a clear advantage in the marketplace. This is another way of saying that your out-licensing has to be consistent with the basic business of the company; so, “advantage” may take the form of:
- Market-share gain as a result of using the technology in a product or process.
- Recognized leadership in that technology sphere.
Now let’s look at reasons why:
Everything being equal, your competitor has to pay more for the technology.
Simply stated, the competitor has to pay a royalty for the right to use the technology. Assuming roughly equal manufacturing costs or purchase costs, then the royalty results in the competitor incurring a cost penalty.
It keeps competitors from designing around your company’s invention.
Licensing out your technology to a competitor or an industry supplier generally discourages your competitor from conducting its own in-house R&D to design around your intellectual property (IP). The implications are that your company then gains control over the technology, and it decreases any likelihood that your competitor could “leapfrog” your company’s technology. Additionally, you also can try to negotiate a “grant-back” clause whereby any improvements made by your licensee either would belong to or would be licensed royalty-free to your company. In effect, this would make your competitor a product-development source for your company.
It promotes new inventive efforts from your people—to work on a next-generation or complementary technology.
Once a competitor has gained the rights to use your company’s selected IP, it often provides an incentive for your company’s employees to develop the next generation—and thereby helps your company recapture technological leadership.
It can establish an industry standard.
If an industry has certain technology standards, then advanced efforts to license out your company’s technology to competitors can establish both a de facto standard and can become the basis for a “real” standard—based on your own technology.
Licensing out of a technology can promote economies of scale.
For technologies that may provide only a small competitive advantage (or no competitive advantage), licensing out to competitors through industry suppliers can yield substantial increases in shareholder value. At Ford, for example, in working with suppliers we found that we could create “win-win” deals that generated new sources of revenue through earned royalties. But, perhaps more importantly, the deals reduced part or system costs by allowing suppliers to leverage the company’s technology and increase their business—while providing a means for the suppliers to increase their profits.
It minimizes the risk of employee raids.
Finally, it would be considerably less costly for a firm to recruit a key employee or employees from your company versus starting up from ground zero to develop a technology your company is successfully utilizing. By licensing your competitor, you remove the incentive to make such a raid.
So long as control of the process is maintained, then I have found…as have many others…that commercializing your IP and technologies selectively to competitors is a proven way to generate new sources of revenue and sometimes create a new “product development” source on your competitor’s “dime.”
Henry E. Fradkin is the founder and principal of Value Extraction, LLC (Dearborn, MI), a consulting company offering services related to commercializing IP and technology. A 30+-year veteran of Ford Motor Company, he founded the corporation’s first dedicated business office for extracting value out of technology and business intellectual assets. He can be reached at (313) 278-1549 and by e-mail at email@example.com or via his Web site of www.valueextractionllc.com.
© 2008 Henry E. Fradkin All Rights Reserved
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