Wednesday, March 3, 2010

Sources of growth - Part 1

Sources of growth for IP management

When a company has managed an established program of licensing IP, it generates a stream of income from its intangible assets.

This is not a guaranteed stream.

Without active management, a number of factors will undermine the flow of royalty income:

  • Natural attrition: There is natural attrition where licensees’ sales volume is reduced or where the licensee goes out of business.
  • Royalty erosion: As I have mentioned previously, a royalty is like a tax. Initially, the licensee sees it as a necessary part of doing business and is prepared to pass on the cost to the end customer. However, it is payment for an intangible asset. With the passage of time, the perceived value of this asset is reduced and the licensee becomes reluctant to pay the premium. Depending on relative positions of power, the licensee may try to negotiate a lower rate. This is an erosion of the royalty rate.
  • Underreporting of royalties: Just as in tax, there can be a temptation to cheat by underreporting the level of royalty payments due. In the case of the state tax system the moral obligation is supported by legislation, audits and threats penalties. A good licensing system depends on selection of committed licensees but supported by a system of strong contracts, audits and penalties.

If the licensing business is not managed actively, the above factors could contribute to an annual reduction of (say) 6% - amounting to a fall of over 25% in 5 years.

Part 2 will outline some of the areas of growth to focus on in IP licensing.

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