Licensing, Good and Bad

A prime use of intellectual property (IP) comes in license activities. The most vital strategic interest of any company is to use IP to protect its product or services. Beyond that are the licensing opportunities.

Licensing takes many forms. There is the simple agreement where one company licenses another company to produce products or services based on the first company's IP. This can be an exclusive agreement or not. The strategic reason for this type of license might be the demand by customers for a second source for the products and services so licensed.

Another good strategic reason for licensing is the income possible from such a license agreement. Everyone is familiar with the substantial royalty income routinely reported by companies such as IBM and Texas Instruments. Obviously, a company must have a strong and broad IP portfolio to realize significant income.

Cross licensing is another popular strategy. Here, two companies exchange selected IP on a non-royalty basis. The decision is that the IP of each company is equal, and therefore such a cross license is most appropriate.

The bad news about licensing is that it is sometimes approached too casually. The company does not do a detailed and rigorous analysis of its IP. It does not properly assess the market value of its technology, or it does not look at related industries that might also want and need its technology. The semiconductor industry, for example, needs to look at markets like flat-panel displays, MEMS and even nanotechnology as other potential areas for license.

If the proper analysis is not done, the company does not set up the optimum license arrangement. Either the royalty is less than could be achieved, or the company agrees to a cross license when its IP is actually stronger than that of the cross license partner. In that case, a royalty arrangement would be better.

A company needs to continually evaluate its IP portfolio for license potential, looking at its portfolio just as it would evaluate a competitor's IP. The portfolio changes continuously with additions, changes to IP law, moves by competitors, acquisitions and new markets. The company wishing to get the most from its IP must aggressively look at any and all license opportunities, but only after a careful and full evaluation of its own IP.