Different competencies may be required depending on the nature of the licence arrangement. Relationship building and maintenance skills are essential, as the licence is an ongoing commitment by both parties to the licence.
The licensor may be required to provide varying levels of ongoing support, such as technical assistance or support, or may agree to supply materials or components required in the manufacture.
In some licences, very little ongoing support or assistance will be required to be given by the licensor.
The degree of resource investment required will depend entirely upon the terms of the licence itself. The licensor may have to protect and enforce its IP rights in various territories. It may have to appoint a relationship manager to oversee the licence. In general however, the licensor’s primary role is to provide the IP, around which the licensee builds a business. Accordingly, a licensor may be required to invest very little in terms of resources.
The stronger the IP protection, the better from a licensing perspective. However, it is possible to licence know-how and trade secrets, which have little if any formal protection. These licenses can be extremely lucrative.
However, the weaker the IP, the more difficult it will be to require higher royalty rates and/or attract licensees.
If there is a significant number of competitors in the market, then there are numerous potential licensees. The determining factor will be the degree to which the new innovation will provide an advantage to one of these operators over their competition, without cannibalising its existing business.
Risk and return
In a highly competitive market, each player may be looking for that slight advantage that the IP might provide.
The risks faced by the licensor are based primarily around the possibility of a poorly performing licensee. These can be mitigated using various performance clauses in the licence agreement and careful due diligence during the negotiations.
However, depending upon the precise terms of the licence, the licensor may also be open to product technical failure risks and market failure risks. However, the licensor’s exposure to these risks will in most cases be far less than that of the licensee.
The returns from licensing depend upon the performance of the licensee(s) and the innovation itself.
- Licensor retains possible upside of blockbuster technology
- Licensee bears most risk
- Mechanisms for control over the process can be negotiated
- Greater ability to access different geographic and field of use markets
- Little capital investment is required
- Licensee takes the bulk of returns
- Possible exposure to poor licensees