For most of human history when an innovator developed a new idea, the only way to extract economic value was to create a product or service and sell it to people. From copper to wheat, from blacksmithing to tanning, all business was trapped in one model: design your clever stuff (into a product or service), produce it, then distribute and sell it.
The capital demands of the industrial revolution led to economic specialisation and the separation of “Deployment” into its constituent pieces: some companies specialised in design, others in manufacturing, others in sales and distribution. Thus was outsourcing born (who knew Apple’s super profitable relationship with FoxConn traces its roots back 400 years). However, the fundamental approach was still deployment.
In the late 1800s as business became more sophisticated two new models emerged:
1. license your “idea” (or brand, design or content) – your intangible asset to others who deploy it themselves and pay you a fee (a royalty) in return; or
2. sell your idea to a third party (who then either licenses it on or deploys it themselves).
The choice of Deploy vs License vs Sale profoundly impacts business strategy. The three models require completely different levels of the core inputs into a business (risk, resource and time) and generate very different levels of output ($). Fundamentally the more you put in, the more you get out. See the diagram below.
Deployment is the most input hungry but produces the highest economic output. So is this why most companies default to deployment – it produces the most zero’s on the cheques?
The answer is no. “Output” represents a business’ absolute return, not margin or return on investment. The significantly higher inputs required for the Deploy model mean that even though it might generate absolutely more outputs when compared to the risk, resource and time required, you might, in fact, be better off licensing or selling your idea. In fact, some of the highest margin industries in the world such as content generation (Disney, Hollywood), software (Microsoft, Apple) and design (LVMH, Prada) are based on sale or purchase of intangible assets.
License or Sale can present unique and powerful benefits. For small companies with innovative intangible assets but limited capital or market access sale or license of those assets can be extremely lucrative. Two client examples: we assisted a small company in New Zealand to license its unique dairy packaging leading royalties being paid on over a billion units (there was no way it could have afforded to manufacture or sell a billion units itself). In the second case we assisted a failed start up to sell its intangible assets and generate a 45X return to shareholders – vastly more than the company could have ever generated if it had launched the technology itself.
For larger companies that have intangible assets that are either not being utilised or fall outside core business than selling or licensing those intangible assets is an extremely effective model for generating additional revenue or releasing capital back into the business. In the early 1990’s for example, IBM’s enormous patent spend led it to switch from a protection-focussed intangible asset posture to actively licensing these assets. Within three years it intellectual property unit moved from being a net-cost centre to generating over $1 billion in net earnings. IBM would needed to have sold $20 billion worth of product to generate the same level of earnings.
Despite the lower inputs requirements and the significant advantages license and sale can deliver, deployment remains the default setting for virtually all companies. Across our offices we see roughly 15 new ideas a week – fewer than 1 of those companies approach us with a strategy to license or sell their intangible assets. Most companies have never even considered they could potentially generate a far stronger return on investment by adopting a different model. As the say, old habits die hard.
What this means is that management should not simply default to deployment. Sale and license are equally viable, present unique advantages and should be actively considered.
One of the most effective ways to assess which model is going to best suit a business is by analysing the intangible asset themselves. Some forms of intangible assets lend themselves more to one model or another. For example content (such as a movie or music) or code (software) are typically protected by copyright and lend themselves more to licensing (but can also be sold). Others such as know how or confidential information tend towards deployment (but can also be licensed). Brand (protected by trademarks) is some of the most valuable intangible assets and can be extremely lucrative when licensed. A strong patent can be usefully leveraged via any of the three approaches. A combination of the models can also generate powerful advantages and business flexibility: for instance, you can deploy in one territory or market segment and license in another. You can also sell your intangible asset and license it back for use in your own industry while the buyer uses it in others.
To quote some long forgotten taxidermist there is more than one way to skin a cat. Although the default strategy for most companies is to deploy we have moved from the industrial age to the knowledge age. Today high margin returns are increasingly owned by those who license or sell intangible assets, either instead of, or in addition to, solely deploying products.