This is part two of the three-part series on licensing strategies. Part one covered direct licensing and how to use it to license different markets, territories and applications of your intellectual property.
Sub-licensing is a second strategy that leverages the resources of your licensing partner to help build your licensing program. It’s a good option if you don’t have the resources to find and manage many licensing partners. You can sub-license in different ways, such as to one or more partners, include some or all of your IP rights, or limit it to specific markets or even product categories.
For example, you license a toy manufacturer and give them “master licensing rights” to all product categories, with rights to sub-license those categories. They, in turn, then re-license your IP to another manufacturer for a royalty rate. In return, your master licensee receives a percentage of the royalties paid by the sub-licensee for managing the licensees. You set a minimum royalty amount for the master licensing agreement, such as 8%. Your master licensee then sub-licenses for 10%, pays you 8% and keeps the difference. In many cases the royalty split is a 50/50 revenue share. This is their incentive for managing the other licensees.
Sub-licensing works best if your IP can be licensed to multiple licensees for different products, such as brands or characters. This strategy allows your anchor or main licensing partner to re-license your IP to other licensees in non-competitive product categories. In this case, bringing on a larger company with sub licensing rights makes sense. It gives your master licensee an opportunity to take part not only from the direct product sales using your IP, but also from the revenue generated from the sub license agreements. It gives them an incentive to help build the market for your IP, because the more successful they are, the more opportunities they’ll have to attract other licensees in non-competitive categories.
Sub-licensing is also a strategy for expanding internationally. It leverages the expertise of a local licensing partner to help license and, in some cases protect, your IP. During my time at the studios, it was a challenge to license directly to manufacturers in Central and South America. We had to use a creative strategy because of the weak or non-existent intellectual property laws. Instead of signing licensing deals directly with a number of companies, we licensed a big distributor who in turn, would sub license the manufacturers. This gave the distributor a big financial incentive to watch licensees and take legal action against piracy. While not the best solution, it was about the only way to keep control of the IP and keep it protected.
Be careful with sub-licensing. Controlling your IP is key. In most cases, you’ll want to check and approve each sub-licensing deal before your partner signs them. You must make sure you’re master licensing agreement is very clear on the terms for a sub-licensee. Generally you want to make sure they are the same as the master license.