Licensing your ideas

By Simon Young, November 2, 2007 @ 2:37 pm

Inveratek’s CrushPak is licensed to Fonterra

Want to keep your idea but share the costs? Here’s how.

Having ideas is fun. Making brand new things is exhilarating. But taking a product to market—particularly offshore—is difficult, risky and it’s not something most New Zealanders would do for kicks.

Praise be, then, for licensing. It’s enabled global corporations to make their mark on every street corner of the planet, but it’s also enabled Kiwi upstarts of all sizes to punch well above their weight in huge markets.

Fonterra uses licensing to get the CrushPak into the Australian market without having to set up shop over there. Christchurch serial entrepreneur Grant Ryan used licensing to quick-start his businesses. Tuatara Management, based a floor above Idealog’s Auckland HQ, has licensed its world-beating software to a company that has a proven ability to market it: Microsoft.

It can be a great way to keep ownership of your idea and let others take it to market. “We use the word ‘licensing’ in many different contexts, but it really just means permission,” says Gus Hazel, senior associate at law firm Baldwins. “A licence means you’ve got the right to do something. What that is depends completely on the circumstances and the product.”

Bradley Mitchell, commercialisation manager at innovation firm Inveratek, says licensing is about balancing risk and reward. “With licensing you can sell the legal right to an idea anywhere in the world. There’s no cost of moving goods,” he says. “But you also cut yourself out of the big rewards at the end of it. You take out the risk, and give up a bit of the reward.”

The advantage to the licensee is that they too cut down on the risk involved in blazing their own trail. “People don’t want to be first, they want to be second and work with a proven model,” he says. “New Zealand’s a really good place for that—there are a lot of talented people here. Prove your technology in the New Zealand market and then you’re in a really good position to reach the big guys.”

Inveratek develops its own products, as well as helping other inventors develop and commercialise their ideas. Their key target markets are the US and Europe because they’re large. “The biggest companies and biggest markets are our ‘low hanging fruit’,” says Mitchell. “After the US and Europe we’re looking at Asia, which as a market is growing fast.”

Most often they’re dealing with huge international corporations, which can be a bit of an uneven power balance for first-time inventors.

“It can be a bit daunting at first,” says Mitchell, “but when we have promising technologies with so many opportunities—we sometimes step back and see that we’re in control of the negotiations.”

That’s because licensing can be a powerful advantage for the licensee as well as the licensor. Simon Rowell, a partner at law firm James and Wells and president of the Australasian chapter of the Licensing Executives Society, says licensing-in (when a company licenses someone else’s idea or product) can be a good way of acquiring a protected technology when it’s either impossible to design around the protection, or impractical to create competing technology from scratch.

Why license?

For the licensor, it comes down to weighing up your options. Which strategy—selling or licensing—will give you the overall benefit you want? Which strategy delivers the least risk? (For instance, you can choose to license rights only in foreign territories, or only to non-core parts of your product or idea.)

For some companies, licensing provides a valuable extra income stream from ideas that would otherwise stay on the shelf. IBM is one of those companies with more ideas than it can use, which is why it has become on of the world’s biggest licensors. End result? Every last bit of innovation adds value to the business, even if that value comes from licensing fees paid by a competitor.

In 2003, IBM told Forbes magazine that licensing delivered US$1 billion in profit to the company. To make the same return through sales, IBM would have to sell products worth many billions.

While IBM licenses ideas, Ferrari licenses its brand. In 1998 the company acknowledged that nearly half its US$28 million profit came from licensing its name, badge and prancing Italian stallion logo. They call it solde trovati—found money.

Licensing is also a low-risk, low-budget way of exporting. It’s another option when you’re weighing up direct investment—that is, setting up shop overseas—partnering with an overseas distributor, or entering a joint venture.

Valuing your ideas

It’s never cut-and-dried deciding how much your idea is worth. “Intellectual property is worth what someone will pay for it at any given point in time,” says Rowell. “As such any valuation is merely a negotiation tool.”

He also points out that value is relative; it can depend on which stage your project is at. “If you license a product at an early stage of development, the licensee is taking on a higher amount of risk, therefore they’ll want to pay less for the licence,” he says. “On the other hand, if you have a product that’s already designed and proven to work in the New Zealand market, you’re in a strong position.”

Sometimes licensing at an early stage is the best thing to do. Hazel mentions the biotech industry as an area where early licensing can move things along. “You’ve got 10 or 20 employees working on a very specific area, for instance the coating on a tablet,” he says. “It’s worth nothing until you put something inside the tablet. But they can license it to a big company, which can then use the coating in their pipeline.” It could be described as outsourcing R&D in specific areas.

What can you license?

Rowell points out the prerequisites for licensing. “A licence is a right to do something that you can’t do otherwise,” he says. If you don’t have particular rights to an idea, people don’t need a licence to use it. So it’s important to know what it is that you’re licensing.

So what can you license?

A patented piece of intellectual property. For instance, Procter & Gamble owns nearly 30,000 patents, but only ten percent are used in P&G products. The rest are turned into income through licensing.

A trademark. Ferrari’s famous name and logo appear on cigarette lighters, watches and even computers, thanks to lucrative licensing agreements.

A character. Modern licensing began with Mickey Mouse (or at least Disney, Inc) licensing his likeness for toys and clothing.

Trade secrets. Think of the recipes for Coke and KFC. Rowell says this kind of IP is the hardest to protect—and also the most lucrative.

A design. Formway licenses its Life chair design around the world—only possible because the chair’s design was completely different from other chair designs and therefore could be patented.

Copyright. While some successful Kiwi TV programmes like Shortland Street are sold outright overseas, other franchises, like Let’s Get Inventin’, have licensed the format to overseas broadcasters.