With a licensing agreement, a licensor can earn money by charging licensees a fee to use or produce his creation or product. Licensing agreements help licensors expand their reach into many markets at once. The overall costs are reduced because the licensor doesn't have to pay for manufacturing and distribution. The main disadvantage is that the licensor cannot control every aspect of the licensee's activities, whether they involve production, advertising or something else. When entering into a licensing agreement, be sure to list the exact scope that is allowable under the contract. Many licensing agreements are exclusive to a particular region so your licensees do not compete against each other for the same market share.
What is Copyright Licensing?
Under the U.S. Copyright Act of 1976, a copyright holder has five rights that he can choose to license to another party:
- The right to copy the work;
- The right to create arrangements or derivatives of the original work;
- The right to perform the work in front of an audience;
- The right to make the work available to the general public; and
- The right to distribute copies of the work.
Music licensing agreements present certain difficulties due to the nature of broadcast media. Licensing fees may be paid for an entire catalog instead of one song at a time. The rates are often tied to the number of people in the audience. For example, a performance in a large music hall can command higher licensing rates than one in a small club.
Intellectual Property Licensing
Licensing agreements for software and other types of intellectual property are similar to those for works of art because they do not involve a physical product. Software agreements can be especially difficult to enforce because software can easily be copied, but is not typically performed in public like a piece of music. IP licensing agreements might be in the form of single-user licenses, multi-user licenses for an entire organization or the rights to resell the product under the licensee's brand.
Entertainment companies might choose to license the rights to their characters or logos. For example, a glassware company may license the rights to Disney characters so it can produce an assortment of Disney-themed drinking glasses. Sports teams and colleges often license their logos to manufacturers of apparel and tailgating accessories.
Inventors who have patented a design or process can license their inventions to other manufacturers of similar products. This increases the inventor's revenue while also helping manufacturers bring their products to market. Payments are typically set up as royalties on each item the manufacturer sells that uses the inventor's design.