The Power of the Force Is Insignificant Next to the Power of Licensing

By Marc P. Misthal

There has been an awakening. Have you felt it? That would be the Disney licensing machine, which started a heavy marketing push for its new Star Wars merchandise at the beginning of September with “Force Friday.” That marketing effort will only continue to build, leading up to the release of Star Wars The Force Awakens on December 18. The Star Wars juggernaut includes all sorts of merchandise, ranging from the usual action figures, apparel and bedding to Darth Vader shower heads, pet costumes, lightsaber pizza cutters and Death Star kitchen timers. J.P. Morgan estimates that Disney will see a two hundred percent increase in global licensing and retail sales because of the new Star Wars movie, resulting in $500 million more in revenue in fiscal 2016, much of it from licensing. This should not be a surprise, since over the years the Star Wars franchise has made more money from licensing than from box office revenue. And that’s really the trick, isn’t it?

Why License?

Today, maximizing revenues through licensing is a more important part of a brand than it was in the past. Licensing can help to promote the core brand through the retail display and proliferation of licensed products. Think of all the Star Wars toys and apparel that is now in stores and which help to promote the new movie. They can also help a brand reach into new categories or stores without requiring a significant investment. Darth Vader shower heads and lightsaber pizza cutters are not necessarily the first things one thinks of when they think Star Wars, but licensing has given rise to both products. Furthermore, with a strong licensing partner a less known brand could find its products in well-known retail stores much faster than if it had sought to place those products on its own. In either case, a license allows the brand to expand by bringing in outside partners. However, one important aspect of a license is that it allows that creator, whether an artist or a corporation, to maintain control over their creation.

Practical Tips

As with anything else, however, licensing takes work. The first step is to do your research and learn about licensing in the particular industry you are interested in and educate yourself about industry norms and standard licensing practices. Attend a licensing show, such as the Las Vegas Licensing Expo or the Hong Kong International Licensing show, to find out what licensing is about.

It is also a good idea to educate yourself about your target market and learn what people are buying and how they are spending their time. With this understanding, you will have an idea of what type of licensing partner to choose in order to maximize return on investment.

After conducting all of your research, perhaps the most important thing is to pick a reliable partner. Speak to others who have worked with the partner you are thinking about working with to find out what it is really like to work with them. Meet the principals face-to-face and try to establish a good rapport with them, since this can evolve into a positive working relationship, which can help avoid problems down the road.

Essential License Terms

No matter how much work you do at the outset, it is generally difficult to tell which licenses will be successful before products are out in the market. For this reason, license arrangements should have certain terms that will foster and encourage success. Some of these terms are listed below:

A well defined territory and channels of distribution–this ensures that both parties know the parameters of where licensed products will be sold. A licensor may want to have one license for the U.S., another license for Europe, and another for China. Or a licensor might want to give one licensee world-wide rights. Alternatively, a licensor may grant one licensee rights to sell products to high-end retailers and another to lower-tier retailers. Having a well written contractual provision can help avoid disputes about where a licensee is permitted to sell (or not permitted to sell) licensed products.

The Licensed Property–knowing what can and cannot be used under a license agreement is critical so that both sides know the parameters of what may be done under the license.

Can only a name be used? How about a character’s likeness, or images from a book or movie? What is being licensed should be unambiguously spelled out.

Quality Control–licensors will want to review products and advertising materials before they are made available to the public. These types of provisions, which typically require the submission of a certain number of products to the licensor, allow licensors to make sure that licensed products are of sufficient quality to carry the brand name. Quality control provisions also allow a licensor to make sure that the look of a product is consistent with the look of the brand what other licensees might be doing. Most importantly, in licenses involving trademarks, the absence of such a provision can result in the loss of trademark rights in the licensed term, a result of a so-called “naked” license.

Royalties, Guarantees and Advances–most licensors granting licenses are seeking to make money. Under a license arrangement, the licensee usually pays the licensor a percentage of their “net sales” (a term that is defined in the license agreement). Many licensors will seek an advance payment to be made before the licensee makes any sales, and which may be credited against royalties. It is also common for licensors to seek guarantees, so that they are assured of a certain level of income from a license irrespective of how the licensed product or the licensed property (in the case of a movie, for example) performs.

Auditing–almost all licenses have some sort of auditing provision to allow the parties to insure that royalties are being properly reported and paid. Some licensors even regularly audit their licensees to confirm that royalties are being accurately reported. Nevertheless, there are many reported cases of disputes over royalty payments, most of which arise as a result of the souring of the licensing relationship.

Enforcement–the license agreement should make some provision for who will take action against infringers or copiers. Often a license will provide that the licensor bears this responsibility. In some scenarios a licensee will have this right, either after a licensor decides not to act in a particular situation or where the licensor lacks the resources to take action.

Marketing Requirements–for a license to be successful, a licensee must promote and sell the licensed products. When a licensee fails to promote the licensed products, the licensed products remain are effectively off the market and they remain tied up with the licensee. To avoid this situation many license agreements contain provisions requiring the licensee to actively market the licensed products. This could be done by the licensee attending a certain number of trade shows per year or advertising in specified media up to a certain dollar amount.

Provision for breach of the terms of the agreement–what happens if the licensee breaches the agreement, e.g. does not sell to required minimums or does not advertise as required or does not timely pay the required royalty? The license agreement should set out what happens if there is such a breach. For example, some breaches may result in the automatic termination of the license while other breaches may be curable once the licensor gives the licensee notice of the breach. In some circumstances breach of the license agreement can result in the forfeiture of the right to sell off any remaining inventory of licensed products.

One thing to keep in mind, though, is that almost everything is negotiable, and the above terms can be customized to fit a particular situation.

Conclusion

Licensing can be a low risk means of expanding a brand and increasing revenues from that brand. Minimizing the risks associated with licensing requires you to do your homework and then, once you have selected an appropriate licensing partner, to have a license agreement that reflects the parties’ intent and the realities of the marketplace. And having the Force on your side does not hurt, either.