What are the advantages and disadvantages of licensing?

A company that owns rights in a patent, know-how, or other IP assets, but cannot or does not want to be involved in the manufacturing of products, could benefit from the licensing out of such IP assets by relying on the better manufacturing capacity, wider distribution outlets, greater local knowledge and management expertise of another company (the licensee). In addition:

Licensors with experience in the field of research and product development may find it more efficient to license out new products rather than take up production themselves.
Licensing out may be used to gain access to new markets that are otherwise inaccessible. By granting the licensee the right to market and distribute the product, the licensor can penetrate markets it could not otherwise hope to serve.
A licence agreement can also provide a means for the licensor to gain rights in improvements, know-how and related products that will be developed by the licensee during the term of the contract. However, this cannot always be demanded as a matter of right by the licensor and in some countries there are strong restrictions to the inclusion of clauses of this type in licensing agreements.
An infringer or competitor can be turned into an ally or partner by settling an IP dispute out of court and agreeing to enter into a licence agreement.
A licence may be essential if a product sells best only when it is incorporated in, or sold for use with, another product, or if a number of IP assets, for example, patents owned by different businesses, are required simultaneously for efficient manufacturing or servicing of a product.
Last but not least, a licence agreement allows the licensor to retain ownership of the IP and at the same time to receive royalty income from it, in addition to the income from its own exploitation of it in products and services that it sells.

The risks of licensing out include the following:

A licensee can become the licensor’s competitor. The licensee may ‘cannibalize’ sales of the licensor, causing the latter to gain less from royalties than it loses from sales that go to its new competitor. The licensee may be more effective or get to the market faster than the licensor because it may have fewer development costs or may be more efficient.
The licensee may suddenly ask for contributions, such as technical assistance, training of personnel, additional technical data, etc. All this may simply prove too expensive for the licensor. It is important that the licence agreement clearly defines the rights and responsibilities of the parties, so that any future disagreements can be quickly and efficiently resolved.
The licensor depends on the skills, abilities and resources of the licensee as a source of revenue. This dependence is even greater in an exclusive licence where an ineffective licensee can mean no royalty revenue for the licensor. Contractual provisions for minimum royalties and other terms can guard against this, but it is still a concern.

A licence agreement can be disadvantageous when the product or technology is not clearly defined or is not complete. In such a case the licensor may be expected to continue development work at great expense to satisfy the licensee.

Advantages of licensing for the licensee

There are various ways in which a licence agreement can give the licensee the possibility of increasing revenues and profits, and of enlarging market share:

There is often a rush to bring new products onto the market. A licence agreement that gives access to technologies which are already established or readily available can make it possible for an enterprise to reach the market faster.
Small companies may not have the resources to conduct the research and development necessary to provide new or superior products. A licence agreement can give an enterprise access to technical advances that would otherwise be difficult for it to obtain.
A licence can also be necessary for the maintenance and development of a market position that is already well established but is threatened by a new design or new production methods. The costs entailed in following events and trends can be daunting, and quick access to a new technology through a licence agreement may be the best way to overcome this problem.
There may also be licensing-in opportunities which, when paired with the company’s current technology portfolio, can create new products, services and market opportunities.

Disadvantages of licensing for the licensee

The licensee may have made a financial commitment for a technology that is not ‘ready’ to be commercially exploited, or that must be modified to meet the licensee’s business needs.
An IP licence may add a layer of expense to a product that is not supported by the market for that product. It is fine to add new technology, but only if it comes at a cost that the market will bear in terms of the price that can be charged. Multiple technologies added to a product can result in a technology-rich product that is too expensive to bring to market.
Licensing may create technology dependence on the supplier, who could choose to not renew a licence agreement, to negotiate licence agreements with competitors, to limit the markets in which you may use the licensed technology or to limit the acts of exploitation allowed under the licensing agreement.

The licensing of IP may run into problems for both licensor and licensee if government regulatory agencies consider it to be anti-competitive or collusive in nature. And of course licences are complex and, if all material terms are not carefully studied and reviewed by legal counsel, can be damaging. With advance preparation and legal advice, however, IP licences become an essential business tool that can benefit both parties.

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Licensors with experience in the field of research and product development may find it more efficient to license out new products rather than take up production themselves.

Licensing out may be used to gain access to new markets that are otherwise inaccessible. By granting the licensee the right to market and distribute the product, the licensor can penetrate markets it could not otherwise hope to serve.

An infringer or competitor can be turned into an ally or partner by settling an IP dispute out of court and agreeing to enter into a licence agreement.

A licence may be essential if a product sells best only when it is incorporated in, or sold for use with, another product, or if a number of IP assets, for example, patents owned by different businesses, are required simultaneously for efficient manufacturing or servicing of a product.

Last but not least, a licence agreement allows the licensor to retain ownership of the IP and at the same time to receive royalty income from it, in addition to the income from its own exploitation of it in products and services that it sells.

The risks of licensing out include the following:

A licence agreement can be disadvantageous when the product or technology is not clearly defined or is not complete. In such a case the licensor may be expected to continue development work at great expense to satisfy the licensee.

Advantages of licensing for the licensee

There are various ways in which a licence agreement can give the licensee the possibility of increasing revenues and profits, and of enlarging market share:

There is often a rush to bring new products onto the market. A licence agreement that gives access to technologies which are already established or readily available can make it possible for an enterprise to reach the market faster.

Small companies may not have the resources to conduct the research and development necessary to provide new or superior products. A licence agreement can give an enterprise access to technical advances that would otherwise be difficult for it to obtain.

There may also be licensing-in opportunities which, when paired with the company’s current technology portfolio, can create new products, services and market opportunities.

Disadvantages of licensing for the licensee

The licensee may have made a financial commitment for a technology that is not ‘ready’ to be commercially exploited, or that must be modified to meet the licensee’s business needs.

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