Main motive 3: revenue from licensing agreements

Property rights are commercialised by means of revenue from licensing agreements according to profit and loss considerations. Licensing policy therefore has a considerable impact on the patent generation sought; questions asked are whether exclusivity alone is to be pursued or whether our patents are generally available to third parties in return for a reasonable royalty, for example to avoid conflicts with competitor and trade administrations on the basis of the enterprise's positioning. 

The formation of alliances also has a considerable impact on the generation of patents. In the case of standardisation alliances or competitor alliances, the partners in the alliance have usually reached a looser arrangement between themselves for the use of the specific intellectual property than in the case of third parties who are not partners in the alliance. These are either excluded completely or have to pay (higher) royalties.

Reputation: whether or not an enterprise is able to generate revenue from licensing agreements therefore depends to a considerable extent on the reputation enjoyed by an enterprise in that sector. What is meant here is reputation especially in terms of technical, financial and procedural experience in the licensing business and the resultant ability to enforce rights vis-à-vis third parties.

Enablement licensing, also referred to as opportunity or carrot licensing: what is sought is a licensee interested in exploiting the subject of the licence. Since exploitation starts only after a licence has been acquired, the talks are generally characterised by the shaping of a joint business model.

Licensing agreements often go hand in hand with technology transfer. Here the following decisions need to be made:

• Which technologies, products or business models are to be licensed?
• What benefits are associated with the licence, from straightforward utilisation of the patent to a full know-how transfer and show-how?
• What is to be kept and what is to be sold (keep or sell)?
• What is to be performed ourselves and what is to be licensed in (make or buy)?
• To what conditions is the award of a licence subject, eg quality assurance for trade mark protection purposes?
• For what region is the licence valid, eg Germany or worldwide?
• Is the licence exclusive or is it also being awarded to competitors?

Case study

Bayer's knowledge exploitation cycle:
Chemicals and pharmaceuticals group Bayer has established a life cycle for knowledge consisting of the following three categories: knowledge acquisition, safeguarding knowledge, and knowledge exploitation. Knowledge is acquired either internally through generating knowledge oneself or externally in the course of contract research, co-operation link-ups and joint ventures, in-licensing or purchase or acquisition. Knowledge can be exploited through internal use, for example through an enterprise's own applications, products, processes and services. Externally the knowledge stored can be contributed to co-operation link-ups and joint ventures, licensed or sold to third parties or contributed in the course of outsourcing or benchmarking. 

The question also arises in connection with the exploitation of industrial property rights as to what the licensing agreement is to cover in addition to the property rights. The less risk there is of later commercialisation on the part of the licensee and the more the licensor delivers, for example customers in a developed market, the greater the market attractiveness of a licence.

The entrepreneurial risk is therefore especially dependent on the development stage and maturity of the technology and the market. In the pharmaceuticals sector, the value of licensing agreements is therefore very dependent on the timing of the licensing project (preclinical phase, clinical phase I, II, III).

One major procedure is the selection of the property rights and, where appropriate, of the know-how that is to be externally out-licensed. Enterprises whose main business activity is the marketing of products and services must be prevented from licensing to third parties in such a way as to inflict on their core business damage which is no longer in proportion to the expected revenue from the licensing agreements.

Industrial property rights which can be out-licensed can be selected using the four-stage process shown in Fig. 7 (Reger 2003). Here the objective is to avoid an unintentional transfer of know-how and property rights and only to endeavour to out-license where there are clearly good market prospects.

Fig. 7. Four-stage process for the selection of property rights that can be out-licensed

Rights of prohibition including know-how and business information comprise, for example, market studies and competitor analyses and can even include co-operation partners and customers. This gives rise to the question of which components can be commercialised.
On the one hand, a complete business model can be externally out-licensed; on the other hand, an internal company spin-up could produce quicker and more sustainable profits.
Although some patents could be out-licensed, in other markets they would have to be offensively enforced at considerable expense. 

Case study
BT Exact's exploitation matrix:
The central R&D function of European telecommunications company British Telecom (BT Exact) uses a specially developed exploitation matrix to determine how and to what extent internal research outcomes are exploited (Fig. 8). If industrial property rights provide adequate protection, where there is a high level of internal expertise the enablement licensing route is chosen and the business model may even be hived off in the form of a spin-out. However, where there is little internal expertise and other enterprises are exploiting the protected fundamentals, the enforcement licensing route is adopted. 

The extent to which an enterprise is capable of analysing markets and developing the market value of its own intellectual property is therefore a major factor in the search for potential licensees. To take business opportunities to the point of breakthrough, matching market applications therefore have to be found for marketable intellectual property. This has to be done both in the case of enablement licensing, where potential licensees are sought, and in the case of enforcement licensing, where potential patent infringers are sought. Supply (sellers) and demand (buyers) therefore have to be appropriately matched.
 

Enforcement licensing, also referred to as assertion or stick licensing: what is sought is a potential infringer of the intellectual property to be licensed. It is therefore assumed that third parties are using the property rights before actually acquiring the licence. Since the potential infringer has generally already spent money and been active on the market, negotiations usually focus on clarifying whether there has been an infringement, whether the property rights have legal validity and, where appropriate, how high the royalty payments are to be.

In the USA there is already a new business model which patent attorneys can use to track down patent infringements, buy up the patent in question, sue the infringer and call in royalty payments. Economically, these models need to be carefully analysed, however.

American mobile radio technology company Qualcomm earns a considerable proportion of its turnover from licensing agreements. One of its three business units is exclusively concerned with the marketing of intellectual property. As many as 130 patents relate to the American mobile radio standard CDMA. Obvious users of the patent portfolio are also convinced of the "need" to acquire a licence. The patent portfolio is also open to potential licensees.

Practical tip
Factors for the successful commercialisation of patents:

• Intellectual property should be treated as a tangible "product"; the business model is crucial
• Technologies which are still in the early phase are very complex to assess; the selection of a suitable assessment model is therefore extremely important
• Focus on quality from the early stages and do not offer any unsaleable products for sale; these will harm the reputation of a technology enterprise
• Technology developments are sunk costs; costs already invested in technology have no bearing on decision-making; potential buyers are not therefore interested in development costs already Incurred but in the expenditure still required in the future, and in the risks and expected revenue
• In the event of patent infringement by third parties, two points should be borne in mind:

(a) clear idea of the chances of success in litigation and prepared assessment of the market

(b) set up war chest for marketing and enforcing own property rights