Licensing Revenue

Licensing Revenue

Investopedia / Jessica Olah

What Is Licensing Revenue?

Licensing revenue is income earned by a company for allowing its copyrighted or patented material to be used by another company. Some examples of things that may be licensed include songs, sports team logos, and technology.

Any time a company's licensed intellectual property is utilized by another entity, that other entity has to pay a licensing fee to the originator of the licensed item they're using. Money collected from those fees by the owner of the licensed item is licensing revenue.

Key Takeaways

  • Licensing revenues are income generated through the approved usage of one company's products, services, or intellectual property by another entity.
  • Licensing agreements stipulate the terms and conditions under which an entity may use the licensor's materials and the fees that must be paid for its use.
  • Licensing is a way to monetize ideas, inventions, IP, or other rights without giving up ownership or copyright.

How Licensing Revenue Works

Licensing agreements are ubiquitous in many industries. For example, companies that use computer software for their daily business operations must typically enter into licensing agreements with the copyright holders of the software. Franchises must license the products they sell as well as the branding and marketing materials from the parent organization. Musical performances of other artists' material must also be licensed if it earns income.

Licensing revenues are a significant source of revenue for several publicly traded companies. For example, a major source of income for the publicly traded company Dolby Laboratories is the licensing of its technology to consumer electronics manufacturers such as DVD player manufacturers.

Other groups that rely on licensing revenues are the National Basketball Association, National Football League, National Hockey League, and Major League Baseball. These organizations grant permission to third parties, such as apparel vendors, to use teams' logos in video games, on clothing, and on other merchandise. The vendor keeps part of the profit for its role in producing and selling the apparel, but the sports association also earns money in exchange for granting the vendors the right to use the teams' logos. In 2010, the MLB sold licensed merchandise worth approximately $2.75 billion.

Understanding Licensing Agreements

Licensing agreements delineate the terms under which one party may use property owned by another party. While the properties in question can include a myriad of items, including real estate holdings and personal possessions, licensing agreements are most often used for intellectual property, such as patents and trademarks, as well as copyrights for written materials and visual art.

Licensing agreements are widely used for the commercialization of technologies invented by universities or government labs.

In addition to detailing all parties involved, licensing agreements to specify in granular detail, the ways in which licensed parties may use properties, including the following parameters:

  • The geographical regions within which the property may be utilized.
  • The time period parties are allotted to use the property.
  • The exclusivity or non-exclusivity of a given arrangement.

Scaling terms, such that new royalty fees will be incurred if the property is reused a certain number of times. For example, a book publisher may enter a licensing agreement with another party to use a piece of artwork on the hardcover editions of a book, but not on the covers of subsequent paperback issuances. The publisher may also be restricted from using the artistic image in certain advertising campaigns.