One advantage of working for a large company is that they have all the resources, including a technology group that handles all the licensing activities. An advantage of self-employment is that I have the ability to dive into different interesting areas that I did not have the opportunity to before.
I talked about intangible assets before. Patents are one of the most quantifiable and perhaps most controversial forms of intangible assets. IBM is famous for its patent portfolio, and for maintaining the top slot for the number of patents issued year after year. Not to forget, their technology licensing revenue generates over $1B annually. If you are interested, check out IFI’s latest report on 2007 top patent owners.
Technology licensing can be a great revenue model for a small firm that does not have the resources to enter or effectively compete in its target markets, or where their technology is applicable to a number of industries. Technology licensing can also enable firms to derive additional revenues through their intangible assets, such as in the case with IBM, ARM, etc. Such licensing agreements can enable a firm to enter a new market quickly and/or reduce potential risks, such as with going into a foreign market. Technology licensing also plays a role in the establishment of industry standards, such as with Qualcomm and CDMA technologies. Through cross-licensing, firms can also gain greater freedom to develop new products and compete in new markets without worrying about potential litigation.
In simple terms, technology licensing is an agreement where one party (the licensor) owns valuable intangible asset(s), and gives another party (the licensee) the legal right to use, modify and/or potentially resell that intangible asset in exchange for some form of compensation. These valuable intangible assets, or intellectual properties (IP), could be patents, copyrighted materials, expertise/know-how, trade secrets, trademarks, and more. There are also many different types of IP licensing: patents, technology licenses, copyrights, trademarks to name a few. In summary, for an effective licensing agreement one needs:
- A licensor, who must have the ownership of the IP, and IP must be protected (or eligible for protection) by law.
- A license that indicates what rights are granted to the licensee.
- A compensation method (lump sum, royalty, cross licensing, …) that is clearly stated and agreed upon.
Technology licensing is certainly an untapped potential for many firms. It is a high margin business that can bring recurring revenue after the initial investment is made and development activity is completed. From a business perspective, building a technology licensing program should be strategically planned, carefully managed, aggressively marketed and legally protected. Below are some of the key building blocks relating to challenges of establishing a technology licensing program. In future articles I will get into some these in more detail. As always, drop me a note if any topics rings an interest with you.
View your technology licensing program as a business
IP, once viewed as a cost center, is now the focus of many firms as a potential revenue stream. However, to maximize their value, these intellectual assets need to be managed to become a profitable business. This process could be handled by establishing a licensing team (a combination of individuals who are intimately knowledgeable with the technologies, business people, product managers) that would have the responsibility to determine potential exploitation mechanisms for the technology. In addition to providing the IP rights, you may be required to develop a service business to support your customers. After all, if your customer is not successful, you are not successful. Whatever your strategy, make sure you establish a strategic intellectual property plan and process to maximize the value of your intangible assets.
Establish an effective organization structure to manage IP
Your organization structure will influence how effectively you can manage your IP. Smaller companies usually delegate the intellectual property asset management function to outside experts. Larger companies usually have their own departments for handling intellectual property asset management related functions, such as IP development, licensing and litigation. However, unless there is an integrated strategic plan and/or centralized management of all IP, it will be a challenge to maximize their potential value due to conflict of long-term vs. short-term focus. In addition to your organization structure, your organizational incentives will also determine how effectively you can build, support and grow your licensing business.
Utilize IP expertise
Licensing strategies differs from technology to technology, market to market, prospect to prospect, as well as US vs. foreign markets. In addition, your success depends on the successful outcome of the licensing negotiation. License terms capture conflicting interests between the licensee and licensor that require careful negotiation and trade-offs. So, get an expert to successfully navigate the unknown waters.
Know your legal protection rights
For your technology licensing business to be viable, you need to have technology that is legally protectable by law. So, whether you are utilizing patents, copyrights, trademarks or other methods, know how to protect them and what the process is in case of infringement. Also realize that litigation is quite expensive and takes time. So, do your homework and manage the risk.
Recognize you are in a marathon
You can’t just build your patent portfolio and stop. Technologies and markets move too fast. You need to build your innovation culture to keep churning new ideas and to build on existing ones to further improve their protection. Otherwise, it will be a short-lived business.
Remember to get paid
Licensing revenue leakage is lost revenue.Your license management program is the key part of your process to ensure you collect your royalties on-time. In addition, your program also needs to ensure that licensees are complying with the terms of the license and operating within the boundaries agreed upon.
Learn to value your intangibles
Putting a $ amount on your intangibles is perhaps the most challenging part of the process. How do you determine what the licensee would be willing to pay and under what payment terms? Understanding how your technology will benefit the potential licensee (cost reduction, competitive positioning, new markets, …) both financially and strategically, is an important starting point. Also, continuously evaluate your strategic market position and maintain your leadership status in the market to maximize your value.
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