"How Much Is The Licence?"

‘How much does the licence cost?’ is a question that brand owners hear often from prospective licensees.

It sounds like a fair question. It is not easy to answer. There is no price list in licensing and no two licensing agreements are the same.

All of the variable terms of the licence must be balanced during the negotiations. You want a 10 year term? The minimum guarantee should go up. You want to pay a high advance? The royalty rate should come down.

The main variable terms are: Property, Products, Territory, Term, Royalty, Advance and Guarantee.

Other variable terms include: Exclusivity, Approvals procedures, Renewal options, Performance targets and Marketing investment.

There are no hard and fast rules for arriving at the advance and guarantee, but there are tried and tested methods.

The best way is to start with the licensee’s sales forecast. If you publish mobile games, how many of the games would you expect to sell during the term of the licence?

The forecast is multiplied by the royalty rate, to arrive at the royalty forecast.

The rule of thumb states that 25% of the royalty forecast should be paid as the advance and 75% guaranteed during the term.

For example, under a 2 year licence with a 10% royalty rate, the licensee forecasts 500,000 downloads of the games and receives €2 per game.

500,000 x €2 = €1,000,000 x 10% = €100,000. Advance €25,000 and guarantee €75,000 by the end of the 2 years.

Like all forecasting, it is educated guesswork, but this is a fairer method than the brand owner plucking a figure from thin air. In most cases, that figure is far more than the licensee is willing to accept.

However, in the mobile content market guidelines derived from the mature licensed merchandise market have been largely ignored, due to the ‘land grab’ mentality of the industry.

Licensees initially chased the brands that they thought operators and consumers would like. Licensors initially grabbed the biggest cheques.

As the market matures, more considered and business-like choices will be made.