Licensing as a revenue model for technology products

A licensing revenue model allows technology producers to monetize their new technology products by licensing them to other companies so that they may be integrated into an end-product.

Applicable industries

The licensing revenue model is applicable to most industries, including:

• Information and communication technologies (ICT)
• Life sciences
• Cleantech

Relevant products for the licensing model

Licensing is most commonly applied to innovations that involve sophisticated technology protected by intellectual property (IP) agreements. The innovation itself may not be a complete product, and may need to be integrated into a broader offering in order to create value for the end-user.

Customer relationships

Licensing agreements rely on relatively intimate and long-term relationships with customers, because all parties must exchange certain (confidential) information, and because the fundamental economics of a licensing arrangement are long-term in nature.

Marketing issues related to the licensing model

The goal of marketing technology for licensing is to drive a deep understanding of the potential applications of the innovation among key industry insiders. Successful marketing for technology licensing focuses on:

• Creating visibility for the technology through industry presentations
• Establishing a presence in academic and industry journals
• Authoring whitepapers
• Evangelizing the innovation

Financial and strategic implications of licensing

Licensing revenues can be structured in different ways, with upfront payments by the licensee or with payments that are revenue-dependent. To license successfully, a company will require the funding necessary to develop their technology to the point where it becomes a suitable add-on to the offering of its licensee partner. Royalty fees may accompany licensing revenue on a per-unit-sale basis, or the parties may use some other transparent means of measuring usage of the licensed technology.

An important consideration in structuring licensing agreements is the portion of income derived from licensing revenue versus that deriving from royalties. Royalty revenue is dependent on the selling ability of the party integrating the licensed technology, and the size of the addressable market for the end-product.

Strategically, licensing may run the risk of exposing IP to the party integrating the technology into their products. It is therefore important to ensure that patents are defensible and that other IP is protected.

Key metrics

If the licensed product is a tangible item, costs are the most important metric to monitor.

Costs and benefits of the licensing revenue model

Licensing works well in situations where developing an entire product independently is not feasible. The trade-off is that since the offering comprises only one element of a complete product, it may hinder the development of a strong company profile, unless an Intel Inside® co-branding option is available.