Businesses do not always have to build all their products and content from scratch. Licensing provides a fantastic opportunity for businesses to collaborate with other businesses to build sophisticated products and services. Take Uber, for example. The core business of this popular ride-hailing app is to help passengers connect with cabs in their neighbourhood. To do this, both the passenger and the driver need to know the exact GPS coordinates of each other over a map. Uber does this by licensing the rights to use Google’s Maps software. This way, the company does not have to reinvent the wheel and can instead focus on their core offering.
Where Licensing Works
Licensing is not for everyone and could backfire if not deployed strategically. A general rule of thumb is to not license your product if the licensor is in the same line of business as you. There are of course exceptions to this. But generally speaking, doing so would let a lesser rival offer a product that is as good as yours. The ideal use-case for a licensing model is where your product forms a small, but vital component of a business with an entirely different business model. Uber’s licensing of Google Maps is a classic example. Other common examples include the licensing of music for use in events or movies, and the agreement to use patented innovations in the manufacture of electronic devices. For instance, Samsung and Google have cross-licensing agreements to make use of each others’ patents.
Economics of Licensing
The objective of licensing a product and not building it yourself from scratch is to cut down costs. Given this, there are two circumstances where licensing makes sound financial sense. The first is with content aggregation. Take businesses like Getty Images or Spotify – these businesses aggregate content from professional creators (in these cases, photographers and music creators). For example, Getty Images offers around 20% royalty to photographers who want to sell their photos online through the site. The reason licensing for aggregation makes economic sense is because the content creation process is decentralized. It may be nigh impossible for companies like Getty Images or Spotify to build their own database of content without assistance from other creators.
The other instance where this makes economic sense is where there is low cost for return value. The reason Uber licenses Map content from Google is because it costs them less to get this information from Google instead of doing it themselves. But licensing Maps from Google costs money and the absolute costs increase with higher usage. In other words, there comes a point when it makes more sense for a company like Uber to build their own mapping software instead of licensing it from a third party. Given Uber’s acquisitions of mapping tech companies in the recent past, it is likely that the company will move away from Google in the near future.
Licensing Revenue Model
Licensing your content or product can be a great revenue generator for your business. This may be done either by charging the licensor for usage or for revenue generated. Charging for usage is the right approach if the licensor is in a line of business that is different from yours. Here, your licensor is essentially a consumer of your product and you may charge them either a fixed usage fee or one based on consumption. If your licensor is in the same line of business as you (Getty Images, for example), then charging them a percentage of the revenue is ideal. This way, the licensee makes money each time their content is sold by a third party licensor.
Licensing is a lucrative business opportunity in a number of business segments – including software development and content creation. Identifying the right revenue model and picking the right target licensor will go a long way in establishing a successful business.