Licensing

In a licensing, the manufacturer leases certain intellectual property rights to the licensee. The licensee pays the licensor (Exhibit 4-3) according to the agreed licensing agreement. There is a fixed fee which is paid by the licensee for the right to use the license over a certain period, for example, for a year, or can pay an agreed percentage of the sold production or the profit received specifically for the services provided during the use of the license or the products manufactured and sold. It can be an inexpensive but effective way for the licensor to start business operations in a foreign country while maintaining control of the product, such as the recipe, ingredients or manufacturing technology. However, there is less control than in case of franchising. Although the license agreement protects the technology and know-how and gives the right to use it only for a specific period of time, there may be problems in the long run, including the risk that the licensee may become a competitor after the license expires. This very much depends upon the situation and in a number of cases a government is involved. When a government is involved, it may have as a primary reason to provide local employment and to reduce the cost of having to import products and potentially benefitting from exporting. Another reason may be that of technology transfer, meaning that there is an explicit goal of becoming a competitor. In that situation the domestic market may initially be open to a foreign company through a license but there is a fixed period and after that local companies are expected to take over.
After finding out what ingredients a drug or drink is made from, the licensee does not have the right to produce the same product after the expiration of the license agreement, but now he is already aware about the details. For this reason, licensing is common in those industries where not only information is important, but also the brand, such as soft drinks, pharmaceuticals. Even if a pill with the same composition is produced, the consumer is unlikely to buy it with a different name than the consumer is accustomed to. In the pharmaceutical industry, the state grants protection to a product’s prescription only for a certain period – three to five years. An organization that has created an innovative pharma product can keep it a secret for a short duration only, later the composition of the drug becomes known to everyone, and such drugs are called generic. After the expiration of the protection period of the product composition, other manufacturers can also produce a drug with the same composition, the marketing name of which must be different from the original manufacturer of the drug. For example, the painkiller and antiinflammation medicine “Ibuprofen” is essentially the name of the active ingredient. Many manufacturers produce the drug with main active ingredient known as “Ibuprofen” or “Izobutilbenzene” but sell it under different names. Thus, the inventor of the drug, had a limited timeframe or just a couple of years, when he basically has a monopoly in the market, increases the price in such a way that in a few years the investments in scientific research and experiments that were carried out in the development of the drug are recouped. After the protection period ends and the drug become generic, many manufacturers appear in the market and all of them start to reduce prices in competition for customers. The organization that created the drug also benefits if it sells the created drug formula in the market through licensing agreements. Thus, every ibuprofen tablet sold, even by a competitor, guarantees the inventor of this drug an income that is proportional to the income from the sale of this drug.
The given pharmaceutical example shows the opportunity for the inventor of the product to earn money, even if a similar product is produced by competitors. Such situation is similar in industries where the industry clock-speed is high so that the knowledge expires relatively quickly.

Ex. 4‑3 Structure and objects of licensing business

Keywords: license, intelectual property, lincensig agreement

In such industries it may be better to not get protection of intellectual property by patent because the patent requires that information is made public. This can notify competitors early on about the details. If protection is not sought, details are not made public and this may be more beneficial for the inventor by the time competitors figured things out, the next generation of products already enters the market, so the competitor is behind again.
Another licensing model is also available, where the right to name the product under the same brand name may be sold. For example, the owner of the world’s most renowned soft drink brand does not opt to get involved in production and bottling of these drinks itself instead choose to license the brand to other manufacturers all over the world. A simpler business model is simply selling a license in exchange for a fee to produce a drink according to the same recipe and with the same name. In this case, since the right to use the brand and to name the drink is also granted, it becomes extremely important to ensure the quality and reputation.
Licensing is a very popular way to market products in the creative industries (Yanto et al., 2023). Licensing applies when distributing rights to video or music works, books, computer software. Authors of works grant rights to various agencies to produce and sell licensed copies of their works in various formats, such as producing and selling vinyl records, printing and distributing books, showing video films in cinemas, television channels or online distribution channels.
With the boom of personal computers in the late 20th century and the proliferation of mobile smartphones in the early 21st century, licensing became a way for software developers to sell their software to consumers around the world. Software companies have become multibillion-dollar businesses, some are of the world’s most valuable and profitable organizations, and their owners the richest people in the world. Although the price of the licensed product is relatively not very high, ranging from several to several hundred US dollars, due to the size of the market and the ease of distribution, the sales revenue of licensed software has exceeded the turnover of many firms exporting physical goods in other industries.
The boom in licensing-based international organizations is associated with the development of computers, but from the beginning this type of business faced one of the major risks. This is illegal product distribution, also known as piracy. If in the case of a physical product, piracy is often associated with the counterfeiting of the original product, which basically means that the product is only similar, but made mostly of other materials, with less quality, then it is much more complicated in the sale of licensed, physically intangible production. In 1995, the first versions of Windows 95 were sold either pre-installed on a computer as OEM or manufacturer’s license or as an optical disc with recorded product installation equipment. However, it was not difficult to make a copy of the software and install it in any other computer, even in domestic conditions, so the use of this software began to spread in the market without even buying it, but simply recording it from a friend’s optical disc. A similar situation happened with the distribution of the most popular computer software for writing, calculating, and preparing presentations. MS Office programs MS Word, MS Excel, MS PowerPoint and others have become an integral work tool of every office employee or student. In countries that had a long tradition of capitalist legal systems, such as North America, Western European countries, piracy did not spread as rapidly in the rest of the world. Over time, the owners of licensed businesses, realizing the complexity of preventing illegal copying, moved from the concept of selling a license to the concept of subscription. Constant software updates, the need to activate software over the Internet, the operation of software for a limited subscription period have made it very difficult to use illegal software, and the license-based global business model has risen to new heights (Stefanovic & Stankovic, 2014). Today, in order to listen to an audio book or read a digital book, watch a movie at home, or listen to music, in most cases it is enough to have a subscription to an online video or audio or reading platform. The ability to sell the created intellectual output worldwide in a market reaching billions of users has stimulated the development of creative industries worldwide. This method of international expansion of business abroad is one of the simplest and easiest, but it must be remembered that the legal systems of different countries, the level of intellectual property protection, linguistic and cultural aspects remain something that must be paid attention to, when choosing this way of doing business.
Licensing is different from patents selling and franchising. Licensing is limited to the granting of the right to use a specific product, while franchising is also the granting of rights, but it usually includes not only the product, but also the method of production or service provision and the entire business model. Patent selling business model is more associated with the protection of the invention and the sale of the right to use the invention. In the case of licensing, similar to the case of franchising, the sale of a license is a transaction between two parties – a transaction between a buyer and a seller, while in the case of patent selling, an important role is played by state patent protection institutions (Shu et al., 2015).