Licensing Business Model – How Does It Work? Exposed!

The Licencing business model deals with the creation of intellectual property that is licenced from third parties. The focus is on the issue of commercialising the rights (how?) rather than exploiting and capitalising the intellectual property. An important advantage of licencing is that the rights can usually be sold to more than one interested party.

Licencing serves as a means to diversify the company’s revenues and risks (why?). In addition, because the products and services often spread more quickly, the brand in question becomes better known and customers are more likely to remain loyal to it (why?).

On the downside, royalties are usually lower than if the intellectual property were sold directly. On the other hand, the products and services are likely to spread much faster, resulting in more sales (why?).

Another advantage of licencing is that it provides the freedom to focus solely on research and development, without the need for additional skills related to production or commercialization of specific applications (how? why?).

These tasks are taken over by the purchasers of the rights. The advantage on the other hand is that no costly, lengthy or uncertain research and development activities need to be carried out.

The origins of Licensing Business Model

The Licensing concept goes back to the Middle Ages, when the Pope granted licences to local tax collectors so that they could be officially affiliated with the Catholic Church.

The practice of transferring rights in exchange for a licence fee continued into the eighteenth century, when two English ladies of nobility agreed to let a cosmetics manufacturer brand a range of products with their names against a share of the profits.

Founded in 1852 by German businessmen, Adolphus Busch and Eberhard Anheuser, Anheuser-Busch is an American brewing company best known as the producer of Budweiser beer.

Busch licensed out his and the company’s name to manufacturers of products such as calendars, bottle openers, knives and corkscrews, who benefited from being associated with the well-known brewery.

Although Anheuser-Busch received limited revenue from these Licensing fees, the company enjoyed wide distribution of a large number of products bearing its name and so established a strong brand identity which encouraged customers to buy beer and other Anheuser-Busch products, with a consequent positive impact on revenue and profits.

The cartoon character Mickey Mouse, created by Walt Disney in 1928, is one of the most famous examples of Licensing. Disney licensed the rights to a company in 1930, which proceeded to produce Mickey Mouse schoolbags. Films, video games and a plethora of other merchandise followed. Using this model, Walt Disney built an exceptionally strong brand and earned immense profits from his creation.

The innovators of Licensing Business Model

One of the best-known companies to use the Licensing business model is probably IBM. The firm was founded in the United States in 1911 and has had an international presence for a long time. IBM started to license its intellectual property at an early stage, before most of its competitors in the information and media technology industry had caught on.

IBM’s research and development department sometimes creates technologies that cannot be directly applied to new products in-house, so at least a portion of its output is licensed to other companies. IBM generates around US $1.1 billion in revenues from Licensing.

Indeed, IBM Research has the specific mission to create innovations for Licensing to other companies. A key prerequisite for Licensing to work is strong and rigorous patenting, which is why IBM attributes great importance to patenting strategies. Based in Cambridge, England, ARM is a software and semiconductor design company developing systems architectures and specifications for microprocessors.

However, the company does not produce microprocessors itself, but rather focuses on the research and development of microprocessors and licenses chip designs to interested companies who then manufacture them.

The company gains a competitive edge in microprocessor R&D by focusing on this aspect while earning significant revenues from Licensing its intellectual property. Another example for a viable Licensing strategy is provided by the German eyeglass lens manufacturer Carl Zeiss Vision.

Instead of having the lenses produced at its own, large manufacturing sites, Zeiss provides small laboratories with licences for the new technology enabling them to accomplish the individualised lens production part by themselves. As a world leader among lens producers, Carl Zeiss Vision was a pioneer in the introduction of this business model.

Carl Zeiss Vision developed and introduced the so-called ‘freeform technology’ more than ten years ago. BASF, the world’s leading chemical company offering a vast product portfolio ranging from chemicals, plastics, performance products and crop protection products to oil and gas, has also applied the Licensing business model lucratively.

Like IBM, BASF licenses out ideas generated by its R&D department which, while comparatively uninteresting to itself, nevertheless have a considerable production potential. But this is not to say that BASF does not apply the Licensing model for products.

With its unique Kaurit Light processing technology for lightweight chipboards (30 per cent less weight and consequently lower transportation costs), the company offered the wood-based material industry an attractive alternative.

BASF has been selling glues and impregnating resins for various applications in the furniture, floor and construction industry since the 1930s, a field in which it is the European market leader. This highly commoditised industry is characterised by fierce competition and high cost pressure. Previously, BASF had applied the dominant business model, selling chemicals by weight.

Since 2013, the company has extended its offering to the wood-based material industry with an innovative solution, applying a new business model centred around the Kaurit Light technology. Under the new business model, BASF licenses the Kaurit Light technology to chipboard manufacturers at the same time as selling them the foamed polymer plus the binding agent.

This approach provides BASF with additional value for its customers (lighter and more cost-effective products) and is able to capture more value than with the traditional business model.

The example illustrates how the introduction of a new business model leads to greater differentiation and a higher competitive advantage in a cost-driven commodity market environment. Created in 1973 and based in Italy, DIC2 is a Licensing firm in the entertainment business representing famous brands and cartoon characters.

DIC2 focuses on providing licences for third parties for fictional cartoon characters from the Marvel Comics, Star Wars and Zorro. The company also represents brands in the art and fashion sector, as well as large companies such as Shell, Route66, and Penthouse. By focusing on the acquisition and management of licences for brands and cartoon characters, DIC2 is able to mediate between international rights holders and licensees.

When and how to apply Licensing

This pattern is best applied in knowledge- and technology-intensive contexts. Licensing presents an interesting option to monetise your products and technologies that do not form the core of your business. Rather than abandoning these products and technologies, you can use a Licensing model to create steady revenue streams for your company.

However, keep in mind that solid patents are a necessary prerequisite for successful Licensing. You may also use Licensing as a tool to raise product or brand awareness and to speed up global distribution.

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