There are essentially two types of licenses. Out-licenses, which involve a company licensing its technology to a third party in exchange for royalties or other consideration ; and in-licenses, which involve a company acquiring the right to use the technology of a third party in exchange for royalties or other consideration.
An out-licensing program can be lucrative for a company, but all licensing programs are accompanied by administrative costs that potential licensors should consider before embarking on a licensing effort. The potential licensor will need to allocate resources towards a variety of tasks, including, supplying information to potential licensees about the technology, protecting the technology, negotiating the licenses, monitoring the use of the technology by the licensees, and collecting/monitoring royalties, just to name a few.
Nonetheless, a well-executed licensing program can offer a number of benefits to a company. Reasons for to out-license a technology include:
- To generate income – If a company is not making or selling products incorporating a certain technology, out- licensing can provide an avenue for generating income from an under-utilized technology.
- To enable a second source – A company may license a technology to a competitor if the company is unable to manufacture a product in-house, or of the market is reluctant to accept a device that has only a single source.
- To improve market strength – Licensing can be used strategically to stimulate market demand for a product, by establishing certain licensed marks or methods as the standard within an industry.
- To minimize legal costs – Licensing can be used to neutralize infringers, thereby avoiding the legal expenses associated with an infringement claim.
- Expand into an export market niche through regional licensing – Licensing can also be used to generate revenue in markets where it may not make sense for a company to have an actual sales presence.
In short, companies considering an out-licensing program around a specific technology should view out-licensing a potentially long-term and stable revenue stream, that is likely to incur ongoing administrative costs.