Licensing is an arrangement whereby the licensor grants the right to another party (the licensee) to use his intellectual property rights for a specified period. In return, the licensor receives royalties from the licensee. The agreement may be exclusive or non-exclusive.
Those intellectual property rights may include patents, trademarks, copyrights, manufacturing processes, and trade secrets. The agreement allows the licensee to use, make, or sell an original copy. Licensees can use patent technology or apply brand names or trademarks owned by the licensor.
The following are examples of Top-10 global licensors:
- Disney Consumer Products
- PVH Corp
- Iconix Brand Group
- Sanrio, Inc.
- Warner Bros
- Major League Baseball and Nickelodeon
- Collegiate Licensing Company
Difference between licensing and franchising
A more advanced form of licensing is franchising. In licensing, the relationship between the licensor and the licensee is only the use of the intellectual property.
In contrast, the relationship between the franchisor and the franchisee is more complicated because it involves more control and interdependence. The franchisor licenses not only intellectual property rights but also procedures and know-how for operating the business. They provide ongoing support to franchisees and allow duplication of the business model.
Next, the licensing duration is between 16-20 years. Meanwhile, the length of the franchise is shorter, usually around five years and may be extended to 11 years.
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Licensing advantages and disadvantages
Licensing is one of the strategies to enter foreign markets. The company has an agreement with licensees in international markets. The risks involved are less substantial compared to other entry strategies such as joint ventures and direct investments because licensors do not need to be involved in operations and commercialization.
It also offers the speed and ease of entering foreign markets. Licensors do not have to face the possibility of tariff restrictions and barriers as in exporting.
Also, licensors do not need large-scale investment to exploit innovation. They simply license it to those who can exploit it and still maintain ownership of intellectual property rights.
However, this strategy also raises various risks. The licensor potentially loses its competitiveness. Occasionally, licensees can copy and use it commercially after the agreement ends.
Sometimes, licensees do not have a superior strategy and are unable to commercialize licenses effectively. Bad strategies and tactics can damage not only the success of the product but also damage the brand’s reputation.