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A brief introduction to Licensing(Posted: 16-01-2009)

By Andrew Carley

For those of you new to the licensing industry, here is a basic guide to the terms and phrases that are most commonly used in the industry. The explanations will hopefully leave you with a better understanding of how the industry works and enable you to make more informed decisions on opportunities that are presented to you through licensing.

What is Licensing?

Licensing enables well known imagery from films, cartoon characters, books, comics sports events etc. to be used on a product to both increase it\'s consumer appeal and provide a distinct point of differentiation and a unique selling point from other similar products. The use of well know imagery is often enhanced through huge advertising campaigns often associated with films or sports events, enabling licensed products to ride on the back of increased awareness.

Terms & Phrases

Licensor - The owner of the intellectual property rights within the imagery, eg. a movie studio, tv company, or sports club. The Licensor in some cases represents their own rights directly and in other cases they might appoint a specialist agency to represent them.

Licensing Agency - The agency (such as CPLG) appointed by the licensor to co-ordinate a licensing programme for such characters, or brands

Licensee - The party who pays for the right to hold the licence and is using licensed imagery etc. on a product e.g a manufacturer or retailer.

The Contract - The contract made between the licensor and licensee binds both parties to agreed terms and conditions. These will differ in content depending on the licensor.

There are however, a number of key terms that are discussed and possibly negotiated before the signing of a licence. These are as follows:

Licensing Product - Licensed product is a product upon which the licensor has permitted the licensee to use the licensor\'s imagery. Product areas are narrowly defined by gender, age and product type (e.g. Boys socks aged 3-12 years). A licence can cover as many or as few products as is required. However, the broader the product areas, the higher the expected sales and therefore the advance required on signature would be correspondingly higher.

Property - Property is the generic name given to all imagery that is licensable. Properties include film, tv and cartoon characters, entertainment, brands, logos of sports clubs and events, logos, music, art, design and personalities.

Advance - To ensure that the licensee will work the licence to the best of their ability, a percentage of the licensee\'s forecasted royalties are payable on signature of the licence. This payment is known as an advance and the amount is negotiable. The advance is security against the royalties. It therefore follows that the broader the terms of the licence, i.e. the higher the number of product areas and the broader the distribution the higher the advance will be because sales and royalties generated will be relatively higher.

Guarantee - A guarantee is a commitment to generate a minimum level of royalty income over the term of the licence. If at the end of the term of the licence the minimim has not been achieved the shortfall must be made up. The guarantee is agreed on signature of the licence and like the advance is negotiable.

Royalty - The royalty is the payment for the use of the licensed property. In some cases it is a percentage based on the cost price of the licensees\'s product (for example, the price of which the licensee sells their product to the retailer). Other royalty levels are based on retail/wholesale prices.

Royalty Declaration - Over the term of the licence both the Agent and the Licensor will need to know and receive royalty payments. Most licences require royalty statements on a quarterly basis. Royalties are offset against the advance, so it is therefore likely that the licensee will not pay any royalties on the first quarter unless the licence exceeds all expectations and the royalties accrued are greater than the advance! Throughout the term of the licence, the licensee would declare their roylaties on a quarterly basis. However, despite declaring, the licensee would not pay any royalties until the total royalties accrued matches the advance paid on signature. Once the licensee\'s generated royalties exceeds the advance, the licensee would be required to both declare and pay.

Non-Exclusivity - Licenses are generally isssued on a "non-exclusive" basis. Under normal circumstances however, an agency would not recommend to it\'s licensors to double licence. Therefore, any licence signed means that the licensee can be guaranteed they are the only ones able to supply the licensed product to the agreed retailers.

Distribution - A licensee\'s distribution covers the network of retailers or outlets that the licensee wishes to sell to.

Term - This is the period of time that the licence subsists for. The length of licences vary depending on the licensee\'s requirements. They are rarely shorter than six months and longer than two years. At the end of the term of the licence, the licensee will be offered two choices. If the licensee fails there is no longer a requirement to continue with the licence at the end of the term it will go into what is termed the sell off period. This period lasts for three months and allows the licensee to sell off remaining stock to retailers but does not allow the licensee to manufacture any more of the product. If at the end of the term of the licence the licensee wishes to continue, the licence would be renegotiated and a further advance would be required. This would be termed as a renewal.

All of the above would be discussed in the deal and confirmed in the form of a proposal. Assuming all parties were happy, a legally binding contract would then be prepared and sent for a signature.