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What is Licensing

Basics and Background

The basic definition of trademark licensing is rather straightforward, if somewhat legalistic. A license is an agreement through which a licensee leases the rights to a legally protected piece of intellectual property from a licensor — the entity which owns or represents the property — for use in conjunction with a product or service.

But the relative simplicity of that definition is a mere gateway to a way of doing business in an ever-widening range of product categories and types of properties.

Licensing is a marketing and brand extension tool that is widely used by everyone from major corporations to the smallest of small business. Entertainment, sports and fashion are the areas of licensing that are most readily apparent to consumers, but the business reaches into the worlds of corporate brands, art, publishing, colleges and universities and non-profit groups, to name a few.

Types of Licensing

Licensable properties come from a variety of sources. The definitions of various property types are not always clear and they often overlap. Although every licensing program is unique, different areas of the licensing business have specific patterns in terms of how they are organized and how business is done.

The chart below shows the different property types of licensed merchandise with their relative shares of estimated overall licensing industry revenues generated in 2021. The chart is followed by a brief description of key industry segments.

  • Entertain/Character (41%)
  • Corporate/Brand (26%)
  • Sports (11%)
  • Fashion (9%)
  • Publishing (7%)
  • Collegiate (3%)
  • Celebrity (2%)
  • Music (1%)
  • Art (1%)
  • Non-Profit (0.6%)

Character and entertainment licensing encompasses film, television, and video game properties, as well as online entertainment and social media. (Characters and franchises featured in books are also a popular licensing category but are generally classified as publishing properties.)

Character and entertainment licensing is likely what you first imagine when thinking about licensing—an action figure inspired by a popular superhero film or a lunchbox based on a beloved children’s show. This category is the largest in the global brand licensing business, accounting for 41% of sales revenue from licensed merchandise and services worldwide.

Licensing provides opportunities for brand owners to capitalize on the excitement around a film premiere or video game launch, and can also be used to keep a property top of mind with consumers in between new content offerings.

The licensing of company names, logos, or brands (referred to as corporate trademark/brand licensing) is one of the fastest-growing segments of the licensing business. Much of the growth is spurred by the fact that licensing provides enormous strategic, marketing and earning benefits to both licensor and licensee.

An ever-increasing number of major corporations in the trademark/brand sector are using their corporate trademarks and brands to build marketing visibility for a core brand by licensing its use in non-core businesses; to protect the company’s trademarks; to enhance their brand images; to increase their brand exposure; and to generate extra revenues and profits. For a brand owner, licensing offers a way to achieve any or all of those goals without making a large upfront investment in internal product development and manufacturing.

The realm of brand licensing stretches from the rather mundane of featuring a corporate logo on a t-shirt to much more sophisticated integrated marketing and product development efforts in which a brand is extended into new product areas in ways that are seamless to consumers.

The licensing of designer fashion names and brands into such categories as apparel, fashion accessories, health & beauty aids and home goods is one of the best-known facets of the business.

In some cases a fashion label may exist only as a license – even the main “core” apparel categories are licensed to third parties for manufacturing, marketing and distribution. The designer or brand owner is responsible for creating the design direction and the marketing umbrella that defines the brand’s appeal. In most other cases, however, the designer or brand
owner creates, markets and manufactures specific core categories, and uses licensing as a way of extending the brand into tangential areas such as other apparel areas (i.e. outerwear or intimate apparel), accessories (i.e. belts, headwear, watches, luggage and footwear), fragrances and beauty products, or home fashions.

Fashion licensing is often invisible to the consumer, who is not to even considering that a third-party licensee is making the products that carry the designer’s name. Of course, in a well-executed, tightly run licensing program, the brand owner maintains strict control over design and quality, and the licensee manufactures to the agreed-upon specifications,  thus achieving a seamless brand image.

Sports licensing has grown in scope and sophistication over the past decade, and is one of the top four revenue producers in the licensing world. In the U.S., the business is dominated by the four major sports leagues — National Football League, Major League Baseball, National Basketball Association and the National Hockey League – along with NASCAR. Each of those leagues runs the licensing business on behalf of its teams out of a centralized league office. Other significant licensing campaigns surround smaller professional sports leagues (i.e. Major League Soccer, Minor League Baseball), organizations such as the U.S. Olympic Committee and the National Collegiate Athletic Association (NCAA), and major sports events such as the Olympics and soccer’s World Cup. In addition more than 300 colleges and universities in the U.S. are involved in collegiate licensing, marketing their rights primarily to the apparel market with sometimes very respectable revenues, depending on the performance of their sports teams and the size of the university or college.

The art licensing community is relatively small and fragmented compared to the other major categories of licensed properties. Art licensing encompasses everything from individual artists who support their artistic endeavors via licensing to well-established businesses that create art and design specifically to decorate a wide range of products, including prints, home décor, housewares, home textiles, publishing, giftware, apparel – literally any product whose appeal can be enhanced via an attractive or evocative image, design or pattern. Today art licensing, because of its timelessness, the ability to target specific niches, year-round profit potential and moderate costs, is a vitally important segment of the worldwide licensing industry.

Why License?

The use of licensing as a marketing and brand extension tool has proliferated over the last 30 years. When well-executed, a strong licensing relationship brings benefits to all parties to the deal – property owners and their agents, licensees and their affiliates, retailers and, ultimately, consumers, Each of those parties has its own goals and aims that ultimately adds value to the final product or service.

To maximize the outcome, each participant in the licensing process has certain responsibilities to fulfill. Every agreement between the licensing parties is unique in its specifics, so even these responsibilities vary to some extent.

There are many reasons for an intellectual property (IP) owner to grant a license. The most obvious one is to generate revenue from the guarantee and royalty payments. But licensing also can serve a number of other purposes. In some cases, those “other” reasons to license might actually be more important to the licensor than the sheer dollars (or euros, pounds,
pesos, won, rupees) that are earned. Among them:

Marketing support for the core business. For a television show, movie, children’s book or sports franchise, the retail display and proliferation of licensed products doesn’t only generate product sales, but it also promotes the core property. An array of toys or apparel tied to a movie, sitting on a store shelf, also helps to promote the movie itself. A sports fan wears a sweatshirt with the logo of her favorite team expresses her enthusiasm about the team, but also subtly promotes the sports, the league and the team to anyone who passes her by on the street. The same goes for a beer brand. Seeing a store display of glassware carrying a well-known beer logo, or walking into a neighbor’s home and seeing the glasses on his bar reinforces the brand image, supporting the brands overall marketing efforts.

Extending a corporate brand into new categories, areas of a store, or into new stores overall. Licensing represents a way to move a brand into new businesses without making a major investment in new manufacturing processes, machinery or facilities. In a well-run licensing program, the property owner maintains control over the brand image and how it’s portrayed (via the approvals process and other contractual strictures), but eventually reaps the benefit in additional revenue (royalties), but also in exposure in new channels or store aisles. Examples might include:

A well-known brand of construction tools licensed into such areas as work gloves or work boots;

A brand of beauty products extended into a new vitamin line that promotes better looking skin.

A popular restaurant chain licensing a frozen food manufacturer to market a line of appetizers under its brand.

A well-known fashion label licensing its name into such natural extensions as leather accessories, shoes, fragrances or home textiles.

Trying out potential new businesses or geographical markets with relatively small upfront risk. By licensing its brand to a third-party manufacturer, a property owner can try new businesses, or move itself into new countries with a smaller upfront investment than by building and staffing its own operations.

Maintaining control over an original creation. Licensing represents a way for artists and designers to profit from their creative efforts, while maintaining control over how they are used. For brand owners (particularly those doing business in the global marketplace), licensing and registering the brands in multiple markets is a way to protect the brand from being used by others without authorization.

In addition to giving the licensee the right to use the property, the licensor assumes several responsibilities that need to be met in order to create a successful licensing program. They include:

A timely and efficient approval process, so that products can move their way along the development chain in a timely way.

Giving guidance (often in the form of a printed or digital style guide) about how the brand, character, logo or other IP can be portrayed within the product, on packaging, or in advertising and promotional materials.

Assisting in marketing activities and, in many cases, helping to sell the brand into retail.

An IP owner also has to be aware of the risks involved in licensing. The brand owner has to be careful to make a deal with a licensee that can create and deliver products bearing the licensor’s brand that are of agreed-upon quality; that can service the retailer adequately; whose goals for the brand align with those of the brand owner, and who can serve as a true partner in a relationship that, when well-executed, is a win-win proposition for all involved.

Licensees lease the rights to a certain property for incorporation into their merchandise, but traditionally they do not share ownership in it. Nevertheless, licensing provides a number of important functions to them.

Gaining the consumer awareness and marketing benefit of a well-known brand, character, logo, design, etc. The most obvious benefit to a manufacturer or service provider the licenses a brand, character, design or other piece of intellectual property is the marketing power it brings to the product. It can take hundreds of thousands or millions of dollars to build a brand from scratch, and licensing represents a way for a manufacturer to take advantage of all the brand building and image building that has gone on before. A child in a toy store doesn’t seek “an action figure.” He’s generally looking for a particular character he’s fond of. Faced with a choice among several cleaning implements, a shopper might be drawn by one that bears the brand of a well known cleaning fluid, rather than a more generic label. In making the decision about whether or not to take on a license, a manufacturer often weighs the potential royalty payments against the cost of building a brand on its own.

Moving into new distribution channels. Taking on a license might help a manufacturer whose brand has been marketed in, for example, mass merchandise outlets to market a more upscale, high quality line in specialty stores or department stores that wouldn’t carry the lower end products.

Reducing in-house costs. A manufacturer who licenses artwork or designs to be applied to hoe textiles, wall coverings, housewares, or on apparel has less reliance on inhouse art staffs that wold otherwise need to be maintained.

Enhancing authenticity and credibility. The publisher of a car-racing videogame might license a host of well-known automotive brands and car models to lend legitimacy and authenticity to the game. Similarly, a maker of automotive parts or accessories will license the car brand to establish in the consumer’s mind that its products will work seamlessly with the cars of the parent brand.

In taking on a license, a licensee takes on a financial obligation, and also an obligation to adhere to agreements in such areas as submitting products for all necessary approvals, creating a product to agreed-upon standards and marketing the product. The risks that the licensee faces in a licensing program are fewer in number than those of the licensor, but potentially greater in magnitude. The major risk is financial – royalties, guarantees and advances. Even if the products do make it to the market, there is no certainty at all that they will do well, no matter what property a manufacturer chooses.

Licensors often retain licensing agents to manage their licensing programs. These agents assume duties for their clients such as contract negotiations or the product approval processes. In return the agent receives a certain percentage of all royalty revenues. For the licensor the advantage of retaining a licensing agent involves the agent’s expertise and network of contacts. The licensor also weighs the cost of the agent against the cost and time involved in building up an internal licensing department to handle the business.

Manufacturers, on the other hand, may retain a licensing consultant whose duties are equivalent (from the other side) to those of the licensing agent. The licensing consultant supports manufacturers who are largely involved in licensing, but who do not have in-house employees to handle the business. It is the consultant’s responsibility to represent manufacturers in their licensing activities, including the evaluation of properties, the checking of their availability or the development and implementation of licensing strategies. The terms under which licensing consultants are paid vary extensively, but the major percentage is paid in commissions derived from product sales.

Global Licensing

In licensing, as in other businesses, it is clear that we are truly, for the first time, experiencing the age of the “global economy”. Nations outside the U.S. currently account for more than 40% of the worldwide total of licensed product revenue. Not so many years ago, most properties that were successful internationally were created and developed in the U.S. and then licensed in international markets. While this is often still happening, as more licensors around the world enter the business or expand existing activities, a healthy exchange of properties across the international arena is now common. Creators of new properties naturally are trying to focus on international appeal as much as possible, as the investment in developing and marketing a property has risen considerably. The use of licensing properties internationally on a range of products potentially reduces both marketing costs and the volume of advertising otherwise required for promoting the property individually.

There is no doubt that licensing in multiple global markets has important advantages for companies that either cannot or do not wish to invest overseas or export their products, but before developing multinational campaigns, licensors should keep a number of key issues in mind, such as the many cultural, linguistic, legal and financial differences that exist in different territories. Thinking globally involves the ability to understand markets beyond one’s own country of origin and requires knowledge of the political and economic situation in the country where a license is to be granted. Of particular importance is the understanding of global consumer behavior and the knowledge of the prospective licensee and his needs and capabilities.

Factors before Entering a New Region

As companies seek to tap new markets in other countries, the question arises as to whether licensing strategies which are effective in one country will also be effective in other countries. Therefore it is particularly important for a licensor to realize that each country differs in its specifics and must be looked at as a separate territory.

Differences may exist, not only in language and the relative effectiveness of different licensing strategies, but also in such areas as market structures, retail patterns, legal systems and limitations, and tax implications.

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