Negotiating Complex Licensing Agreements II - Opportunites to Extend a Licensing Program

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In this brief article we take a moment to identify ways to best extend the life of a successful licensing program. In today’s constantly changing society, and in a licensing industry faced with increasing compression and competition, the ability to hold licensees and renegotiate successful agreements with them becomes increasingly important. In the face of the pressures within the licensing industry (and within consumer goods in general), the rising importance of successful renegotiation cannot be overestimated.

Time is the enemy of most licensing programs. With more rapid technology change, shorter and quicker product introductions, shorter retail lead times, smaller retail orders, shorter attention spans among consumers, the faster pace of societal change, and greater licensing competition, one must continuously adapt—and adapt more rapidly: As a general rule, the life span of a licensing program is going to continually shrink, with few exceptions. The average licensing program cycle time is substantially shorter today than it was 10 or 20 years ago.

When a corporation is trying to revitalize and extend its licensing program it is important to brainstorm, identifying and discussing alternative ideas and concepts prior to entering a critical negotiation. Conceptually, the management team starts with a broad scope so that many ideas will be considered and discussed. From this point, it is important to narrow the scope so the strategy will be focused.

Alternative Negotiating Strategies and Techniques

There have been many books written on the negotiating process. This brief article is intended to be a helpful guide when negotiating license agreements, whether for trademarks, technology, character licenses, celebrities, patents or music rights. Some of the negotiating techniques to be aware of include the following:

Bulwarism – Bulware, the infamous GE Labor Relations Manager, is the father of this technique, based on the principle that the first offer given is the best and only offer that will be given. However, a more realistic way to look at it is the refusal to bargain in good faith. Clearly, it is a bankrupt technique, and one that is rarely successful although it is still seen occasionally in negotiations.

The unbundled approach to negotiating a license agreement is one that we often use. In this approach we break the agreement into two or three sections; each is treated as a separate piece. When the separate piece is fully negotiated, then the next piece of the agreement is brought to the table. While the advantages of the technique are that it breaks down the negotiations into more manageable pieces, it can artificially separate integral parts of a single negotiation.

The components of value approach to negotiating a license agreement is a technique that we helped pioneer in licensing. The underlying principle states that in any negotiation there are three, five, or ten primary items that have to be negotiated. These items can include the term, royalty rates, guarantees, separate fees for product design, advertising, etc. This approach is useful when there is a hybrid agreement to be negotiated; one that involves perhaps a trademark, a technical process, copyright and/or patent. (See Part III)

The final technique we always use is: Northing is agreed upon until everything is agreed upon. In other words, as one goes through the negotiation process, addressing specific issues, the two parties may agree (for example) on minimum annual financial guarantees. However, later in the negotiating process that agreement on minimum guarantees may have to be readjusted in order to get agreement on other issues such as length of the contract or number of product categories involved.

There are, of course, other negotiating techniques or postures that we often see. Among those is “the unique market syndrome,” and the “the sky is falling” doomsday technique. In the first case, “the unique market syndrome,” the position is basically the following: You can’t work this market without us. The one party takes the position that they are the only alternative in the negotiation and that the other side should recognize this immediately. This is a form of brinkmanship (although it is also often a form of hubis). The second, “the sky is falling technique,” is seen quite often. In this scenario, typically put forward by the licensee, the blackest possible picture is painted—this technique is based on the hope that by painting such a black picture, the other party at the negotiating table will immediately lower its sights and become more flexible in its negotiations. There are permutations and combinations of all these techniques and combinations that can be used in any negotiation.

The sum, the licensing industry has become more complex over the last decade, and has gone through a period of consolidation, retrenchment and decline. As a consequence, the negotiating process is more important today than it ever has been. As one sits down to renegotiate with existing licensees or to bring a new licensee together in a negotiation, each party must be far more critical and concise in assessing their interests, issues and realistic solutions—the process of negotiating a license agreement is not becoming simpler, it is becoming more complex.

Summarizing The Art Of Negotiation

Let’s return to our original question: What is a successful negotiation? It is that negotiation that best advances the interests of both parties through joint decisions and actions. The key first step is for each party to identify, assess and prioritize their full set of tangible and intangible interests. Once the parties understand their real interests, they can then move on to the specific issues and positions that each needs to address. It is important to not let the hard issues drive out the critical soft issues that can be equally important over time. Remember too, that negotiations are a means to an end, not an end in and of themselves. In negotiating, both parties’ BATNA must always be kept firmly in mind. If there is no BATNA for one party, the rules of the game change.

Most importantly, remember that their problem is part of your problem. Understand what their needs and pressures are, and do not make the classic error of thinking that “It’s their problem, they have to solve it.” Part of the process is the art of concession management, and effectively using some of the techniques we have described here.

Creative Renegotiation

In the face of these facts, then, the most critical issue facing a licensing manager is how to extend a successful but mature program. However, a mature program doesn’t mean a stagnant or static program. The following outlines some suggestions on how to renegotiate and extend a mature, successful program so that it remains viable—and profitable.

Add new licensing elements (sub-brands, new technology, etc).
Try co-branding or co-licensing.
Extend licensee product lines with new designs, logos, etc.
Modify existing terms and restrictions. In other words, if you need to be flexible, do so.
Add parallel licensees. If you have a retail licensee, add a direct-mail licensee. If you have a mass-market licensee, find a specialty market licensee.
Modify the definition of your licensee’s product lines.
Extend retail distribution up, down or sideways, go up the chain, down the chain or expand sideways with direct marketing.
Modify pricing strategies and price points.
Begin working with the licensee’s distribution channel and retailers. Involve them in timing, product selection and off-peak promotions.
Expand geographically. Go to China. Go to Europe. Export.
Reduce dependence of the program on its core vehicle. If the core vehicle is a patent or single logo element, find ways to make the program live beyond its lifespan.
Encourage sub-licensing. At the beginning of the program, you may not want much sub-licensing, but when you are in the fourth, fifth or tenth year, you may want a lot of sub-licensing.
Help your licensees when they get into trouble. If they have poor products, help them dispose of them.
Finally, a new look: New graphics, new characters, new colors, new logo treatments.

Maturity does not have to mean stagnation. Remember, in licensing and in the consumer marketplace, the only constant is change. The final thought is to remember that the licensee always has a BATNA (Best alternative to a negotiated agreement). Therefore, an analysis of their alternatives, their interests, their issues, their needs and their positions is of paramount importance prior to beginning the renegotiating process. If this analysis is undertaken by a licensor, in advance then the chance of renegotiating and extending a mature program increases dramatically.