05_597159 ch01.qxd 5/26/05 2:34 PM Page 7 Chapter 1 Licensing 101 In This Chapter ᮣ Getting the lowdown on licensing jargon ᮣ Checking out the benefits of licensing ᮣ Knowing which types of properties are licensed ᮣ Looking at licensing agreements icensing is the process of leasing a legally protected (that Lis, trademarked or copyrighted) entity — a name, likeness, logo, trademark, graphic design, slogan, signature, character, or a combination of several of these elements. That entity, known as the property or intellectual property, is then used in conjunction with a product. Many major companies and the media consider licensing a significant marketing tool. In fact, licensing has become one of the most powerful forms of mar- keting and brand extension. This chapter gives you an overview of licensing, from master- ing licensing lingo and understanding the benefits of licensing to looking at the types of properties that are licensed and studying the basics of a licensing agreement. UnderstandingCOPYRIGHTED Licensing MATERIAL Lingo Licensing is usually based on a contractual agreement between two business entities: ߜ Licensor: The owner or agent of the property ߜ Licensee: The renter of the rights, who is usually a manufacturer 05_597159 ch01.qxd 5/26/05 2:34 PM Page 8 8 Part I: Licensing Basics The history of licensing Modern licensing started making its doll that bore the likeness of those mark in the 1930s when Herman “Kay” two popular characters. Kamen secured the licensing rights Merchandise licensing really took off to Walt Disney properties. Thanks to in the 1980s as a result of several movies, the comics, and radio, these breakout properties that were used forms of entertainment reached larger on a wide variety of products. These numbers of people than ever before. properties were introduced to con- In addition to Disney, names like Little sumers through a variety of media: Orphan Annie, Jack Armstrong, and movies (Star Wars), TV shows (The Bugs Bunny entered American house- Smurfs, He-Man), toys (Cabbage holds in that era. Patch Dolls); sports (major leagues, One of the very early licensing suc- colleges); and corporate advertising cesses during this period was the slogans (California Raisins, Spuds unprecedented sale of Shirley Temple MacKenzie). Manufacturers lever- look-alike dolls. The Ideal Toy Co. aged the exposure and success of directly credited the growth of the these properties to sell more of their company to the foresight of an exec- products by featuring the property on utive who secured the right to license their products. a Shirley Temple doll. The availability of properties and With the advent of television in the licensed merchandise is overwhelm- late 1940s and early 1950s, the licens- ing today, and more and more brand ing industry took off. Television owners, media companies, and manu- reached into the living rooms of tens facturers look to licensing to help grow of millions of homes and introduced their businesses. Today, the licensing the youth of the country to Hopalong industry has grown to $172.7 billion in Cassidy and Howdy Doody. Soon, retail sales worldwide. almost every child had some toy or You can find out more about licensors, licensees, and licens- ing agents in Chapter 2. The formal permission to use the owner’s property is subject to certain terms and conditions, such as a specific purpose, a defined geographic area, and a finite time period (see Chap- ter 5). In exchange for granting the rights for a certain property to the licensee, the licensor is paid in some way. The basic 05_597159 ch01.qxd 5/26/05 2:34 PM Page 9 Chapter 1: Licensing 101 9 component of this payment is the royalty, which is a percentage of the licensee’s sales of the products that utilize the property. The royalty is usually based on the selling price (either whole- sale or retail), less certain trade discounts, or it may be based on a fixed dollar amount per licensed product sold. In addition, a guaranteed minimum royalty, the guarantee, is usually required, and the licensee has to pay this guarantee even if the product doesn’t sell. A percentage of this guaran- tee is normally paid as an advance, an amount of money paid to the licensor in anticipation of royalties before the licensed product is sold. Unlike an outright sale of work, a license does not transfer title to the property. What this means is that the property does not belong to the licensee. Instead, a license grants the licensee rights to the use of the property for specific pur- poses. Generally, the agreement specifies a timeline (the term) and a specific area in which the licensing agreement is valid (the territory). Here’s a simple example of a brand extension licensing pro- gram that helps you identify the components of the licensing relationship: ߜ Licensor: The Procter & Gamble Company ߜ Property: Mr. Clean (trademark and character icon) ߜ Product: Cleaning gloves ߜ Licensee: Magla Products Procter & Gamble (the licensor) licenses Magla Products (the licensee) the rights to use the Mr. Clean brand and the Mr. Clean character and icon (the property) on its line of clean- ing gloves to sell to the retail trade in the United States and Canada (the territory) for two years (the term). Magla Products pays Procter & Gamble a percentage of the wholesale sales of its Mr. Clean cleaning gloves in the form of royalties, and these are paid quarterly. A license agreement is in place that specifies all the terms and conditions of their relationship. P&G has also licensed Mr. Clean to licensees for cleaning tools, automotive accessories, T-shirts, and men’s loungewear. 05_597159 ch01.qxd 5/26/05 2:34 PM Page 10 10 Part I: Licensing Basics Seeing the Benefits of Licensing A licensing agreement is a powerful marketing tool for both the licensor and the licensee. Benefits to the licensor include ߜ Increasing the awareness of the property. ߜ Expanding the consumer association with the property. ߜ Extending the property into a variety of products and markets without the licensor having to invest in creating this extension. ߜ Receiving legal protection for the property. ߜ Generating revenue through royalties. Benefits to the licensee include ߜ Associating its product with a known property. ߜ Creating instant recognition and awareness of the product. ߜ Adding value and differentiation to the product. ߜ Increasing sales. Differentiating the Types of Licensing You can find many different types of licensing, and few products or brands fit neatly into just one licensing category. Chapter 3 discusses the types of licensing in detail; for a quick rundown, take a look at the following list. ߜ Corporate trademark and brand licensing: Nike isn’t just for shoes anymore; put “Nike” on just about any- thing, and you’ve got yourself a marketable property. When a brand is a hot seller, that brand is also a hot licensing property. The corporation wins, because having its name, logo, or brand on additional products increases brand awareness. The licensee wins, because the Midas touch of certain corporate brands sells products in unfathomable numbers. When you see how the names 05_597159 ch01.qxd 5/26/05 2:34 PM Page 11 Chapter 1: Licensing 101 11 of clothing retailers Eddie Bauer and L.L. Bean have sold cars (Ford and Subaru, respectively), you get an idea of the scope of corporate trademark and brand licensing. ߜ Character and entertainment licensing: Characters from movies, books, and TV shows have always been popular, but the phenomenal success of Star Wars and Harry Potter licensing has made character and entertainment licensing one of the strongest types of licensing. Children’s enter- tainment, especially, has offered exceptional licensing prospects, but the adult audience for The Simpsons and The Lord of the Rings has expanded this type of licensing. ߜ Sports licensing: College mascots, pro teams, and Olympic and World Cup products are just a few of the sports licensing opportunities. Teams license their names, mascots, and/or logos — and customers end up drinking out of a limited-edition NASCAR beer mug or sporting a Red Sox jersey. Included in this category are the big-four pro teams (football, basketball, hockey, and baseball), NASCAR, the World Wrestling Federation, about 160 colleges and universities, several women’s pro teams (basketball, soccer, and golf), and Olympic and World Cup teams. ߜ Fashion licensing: Fashion licensing no longer stops at apparel and shoes. Now, designer names (such as Prada and Ralph Lauren) are available to licensees for items ranging from home décor to luggage. ߜ Art licensing: A growing type of licensing includes the license to reprint or reproduce photographs, paintings, statues, and so on. Artists’ images are also often found on stationery and home décor items. ߜ Celebrity and estate licensing: A celebrity’s name, face, laugh, signature, or other significant feature can be a lucrative licensing product. Everyone from celebrity chefs to sports stars to politicians — both alive and deceased — are lending their names to licensed goods. ߜ Toy and game licensing: A toy isn’t just a toy. No, a popular toy is an opportunity for additional licensing products, including apparel, home décor, and other items (think of Barbie sheets, dresses, computer soft- ware, books, and so on). 05_597159 ch01.qxd 5/26/05 2:34 PM Page 12 12 Part I: Licensing Basics ߜ Music licensing: Musicians are some of the biggest celebrities on the planet, and when they want to branch out from music to apparel, books, or cosmetics, consumers respond. No longer are music-based products sold only at concert venues and music stores; celebrity musicians and their products have made their way into the retail chan- nel, from discount stores to upscale department stores.