Licensing not only controls the cash flow generated from your intellectual property, it also creates a multiplier effect that increases the income generating opportunities for your intellectual property.
For example, when a TV show or a movie is developed, its primary product is the entertainment content. However, in addition to the entertainment content, other cash flow sources are created through licensing. Most often this includes merchandise such as T-shirts, hats, shorts, and other product categories, as well as cross promotions with other brands (such as fast food), live events, and other types of non-theatrical entertainment content. Licensing also expands the TV show or movie internationally, creating in turn, more licensing opportunities around the world.
Another lucrative side of licensing is recurring revenue known as royalties. Recurring revenue is one of the highest profit margin forms of revenue, continuously regenerating year after year. Similar to commercial real estate that is only built once, but continues to collect rents for years to come, IP is the intangible version of real estate (i.e. intangible property). There is ongoing cash flow (royalties) from all the licensed products and like a long-term lease, that income can be substantial. Some of the biggest kids movie franchises generate hundreds of millions of dollars in annual royalty revenues.
In speaking with IP owners, one of the first questions they ask me is how high or what is the going royalty rate to license their intellectual property. The answer is it depends. While there are averages for different industries, such as computers and consumer products, individual royalty rates vary based on the specific licensing deal. The royalty rate reflects the potential cash flow and profit margin created by your IP. Most often, it comes down to what is negotiated between you and your licensing partner.
Licensing revenues and the commercial appeal of an IP tends to go in cycles. One of the nice things about intellectual property is that it can change and evolve. It’s common to see products or technologies enter the marketplace, reach a peak and then start to decline, and then re-emerge through new markets and product applications, creating new cash flow opportunities. Entertainment content is a good example of an IP that evolves and re-generates itself. It could start as a TV show, grow to a theatrical movie, becomes a live show, transform into a video game and comes back again as new TV show. Kids animated TV shows and movies are great examples of this re-generation. Characters such as The Teenage Mutant Ninja Turtles, Batman, and GI Joe are examples of kid’s properties that have re-generated themselves in the marketplace.
Another way to leverage IP revenue is through sub-licensing, where the original licensee has rights to re-license to someone else. It is a licensing strategy that leverages both the revenues and the licensee, as well as a strategy to incentivize an early licensee. For example, a new brand wanting to expand its consumer awareness could offer a master license with sub-licensing rights to a larger non-competitive company. A similar strategy could be used by a small business wanting to expand internationally. One of my clients used this strategy to successfully launch their product in Europe. We licensed a large distribution company and gave them sub-licensing rights to some countries in Western and Central Europe. In this case the master licensee had rights to produce and sell, and could also generate revenue by licensing other companies in different countries.
Unlike a one-time product sale, licensing intellectual property generates recurring revenue from one or more licensees. Recurring revenue is auto pilot revenue, and is regenerated year after year. Your IP goes up and down in cycles. As your IP peaks and starts to decline, it can be changed and re-emerge in the marketplace creating new licensing opportunities, such as entertainment content evolving from TV shows, to merchandise, to movies and back to TV shows. Remember, licensing is about leveraging your IP cash flow rights. It’s a dynamic process that requires actively managing your IP to make the most of its money-making opportunities.