Licensing Definition: 4 Types of Product Licensing

In business, licensing is a contractual agreement between two business entities where one company leases its intellectual property (IP) to another company under specific terms and conditions. Intellectual property is intangible assets and ideas created by the human mind, including copyrights for written and visual media, patents, trademarks, brand names, and trade secrets. The licensor or property owner is the company that grants access to its intellectual property with a licensing agreement. In contrast, the licensee or permitted party is the company that requests the use of the licensor’s IP.

A licensing agreement defines the terms by which the licensee may conduct business with the licensor’s property. These terms include the specific period allowed for use, the geographical locations in which the licensor can use the product, and the specified payment of licensing revenues, also known as royalties or licensing fees. The licensor receives royalty payments for the exclusive rights to their product.

From growing a new business to exploring new markets, there are several reasons companies license products:

• Control: Licensing deals grant the IP owner more control over the use of their intellectual property. This business arrangement protects brands and allows product creators and designers to profit from their licensed products without worrying about unauthorized use.
• Exploration: Licensing gives IP owners access to new markets with little upfront risk. They can expand their brand into new territories or geographical regions without investing in building and maintaining a base of operations there.
• Extension: For established brands, entrepreneurs, and small business start-ups alike, licensing can extend their product into new areas. Companies trying out new products, especially in new markets, maintain control over their product while also reaping the benefit of revenues and expanded exposure for their brand.
• Support: A licensing agreement supports established brands by opening up new revenue and promotional streams. For example, sports teams that license their logos for use on clothing, collectible items, or other retail goods generate licensing fees for the team and promote their brand whenever a consumer uses or wears that item.

There are several different types of product licensing. They include:

1. 1. Brand licensing: A brand license or trademark license grants the licensee the rights to distribute products that carry the brand owner’s name or trademark, including an organization or designer’s name, logo, or slogan associated with the brand. The license fee may be independent of the revenue generated by the licensee or may increase or decrease based on revenue. Licensed production is a license agreement that allows the licensee to both distribute and manufacture brand products.
2. 2. Copyright licensing: Copyright licensing grants the licensee the intellectual property rights to use a copyrighted item. These items may include books, movies, musical recordings, artwork (including characters or images from animation or illustration), dance choreography, computer programs, and even buildings.
3. 3. International licensing: International licensing gives a foreign business entity the right to manufacture or use a company’s product for its market. While there are many benefits to international licensing for IP owners, there may also be obstacles exclusive to foreign territories, such as quotas or tariffs.
4. 4. Patent licensing: A patent license gives a patent owner or holder control over their patent while granting the licensor access to the patent, typically for manufacturing or distribution purposes. Licensing requirements—which usually include all of the documentation required to acquire a patent—make patent licensing complicated.

The difference between licensing and franchising comes down to the rights granted by the licensor. Both licensing and franchising grant another entity the right to another company’s intellectual property. But in a franchise agreement, the licensee, or franchisee, receives both the brand and the operations of the licensor (or franchisor), whereas the licensee receives only trademarked items like copyrights or patents.

The franchisor determines how the franchisee operates this business extension and receives a fee from the franchisee, who receives training and direction from the franchisor.

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