Book Reviews
How to License Technology
Robert C Megantz
ISBN: 978-0-471134-10-7 1996 240 pages John Wiley & Sons
Judy Mercure
CEO, Calibre Communications, Avalon NSW
Written by a Silicon Valley-based licensing consultant, How to license technology is a compact (143 pp of text with 81 pp of case studies, agreement samples, information sources and other tools) practical licensing primer. It has been written for both novices to licensing and for specialists who have experience but who are interested in learning more about other aspects of the licensing process.
This is clearly written, well-structured text. Despite the fact that legal references and case studies come from the US, it is not so biased that it cannot be a useful resource to licensing professionals in other countries. The book provides practical advice, not only for licensing in, but also licensing out of technologies. In the author's view, there exist many compelling motivations for licensing activities, including the benefits of reaching new markets, or reaching them faster, economic and other returns, and minimizing legal costs and obstacles, such as the risk of infringement.
The first chapter focuses on the issue of whether licensing is the right strategy to pursue for companies in possession of intellectual property expressed in a new technology. The risks vs rewards of various exploration tactics are treated, with licensing positioned as a relatively low risk approach, compared with launching a new technology-based start-up or investing in a joint venture or new corporate acquisition. The author points out that lowering risks of course also lowers potential rewards, but book contains some useful advice on how to optimize rewards if technology licensing is the approach selected. Factors which should be taken into account in making the choice of an approach include the operating strengths and complementary assets which may determine how large a role the company can play in technology development and commercialization.
An overview of methods shows how technology assessment has developed from an art to a science.
The author suggests that although licensing out is relatively low risk, decision makers in companies should balance revenue projections with a realistic assessment of costs associated with protecting IP, negotiating licenses, providing for expenditures required during the life of the license agreement and, often, afterwards.
He warns that the licensing organization must plan for a negative cash flow for an initial period, often for several years, as markets are effectively reached. With the increasingly short life cycles of new technologies, licensing professionals have to consider whether the investment period may not outlast the life of the product.
Chapter two deals with development, protection and use of intellectual property (IP). It explains in clear terms what patents, trademarks, copyright, and other forms of IP protection cover. The author discusses briefly what types of patents exist, who may own (parts of) them, and what protection they offer to their owners. It provides some useful general tips on how to write a claim, including offering advice of patenting for foreign markets.
The necessary conditions for patent coverage of novelty, non-obviousness and utility of the invention are described. Considerations affecting the decision of whether or not to invest in a patent (with filing fees beginning at US$4000) are discussed. Many of these considerations revolve around the existence of a market demand large and durable enough to make the investment profitable, circumstances that may be difficult to assess when a patent application is filed. This chapter also treats the use of patents to establish and maintain a market position by preventing others from obtaining exclusionary rights or when developing a comprehensive portfolio of IP rights that may be more valuable together than separately.
Trademark and copyright use and their potential contribution to the value of eventual technology licenses are treated, as are common law protection and protection against infringement in other countries. The chapter covers know-how, mask works and other forms of corporate IP. It discusses the importance of managing IP assets through careful research and support activities.
Chapter three treats researching the market. As might be expected, 'How to license technology' has been written from a technology-push perspective. Market research and promotions are seen generally as activities that are conducted after the fact of technology development, to find a market for new technologies. The realities of life are that this is often the way technology marketing is approached, particularly when the sources of the technology are universities or government funded R&D organizations. Pre-development assessment processes that are part of appropriate technology development are not treated in this text, apart from a brief discussion of business intelligence acquisition activities that may establish the general existence and characteristics of a market for a technology genre.
This short chapter provides a checklist of sources of information that may help a technology licensor evaluate market size and demand over the lifetime of the technology. These include general information on companies and competing products in the market, advice from inhouse marketing and engineering personnel and eternal sources of industry information, such as online and subscription services, the Internet, trade publications, trade associations and shows. This chapter also covers the need to conduct related patent searches, university publications and research review meetings and government information sources on companies, products, technologies and markets. A model is provided for reporting on the data in a market overview, with revenue projections and strategy recommendations, although this model is spare in the extreme and lacks a SWOT analysis or due diligence recommendations that one might have expected.
Chapter four covers technology valuation. Benefits of technology assessment to both licensor and licensee include supporting the quest for financing, use in infringement proceedings and to obtain tax advantages. The development of technology assessment from an art to a science is described with a brief overview of method developed by accountants and other assessors.
These methods include:
Cost-based valuations, which compute the value of the technology with the costs of replacing it, either with identical or equivalent technology. There are disadvantages in this method, as these valuations do not take into account the commercial value of the technology being valued.
Market-based valuations, which analyze comparable transactions to determine a technology's value. These depend upon an active market in comparable technologies and existence of reliable sales data, complicating the assessment.
Economic analyses estimate future income attributable to the use of the technology. As the recommended approach, this is treated in some detail, but the author acknowledges the difficulties of accessing market knowledge, estimating projected earning, estimating royalties (a rule of thumb of 3-5% of manufacturers' selling price is used as an example), and estimating related business assets required for a good economic analysis. Complicating the analysis is the need to discount cash flow including future revenue to estimate current value, but the author provides some model calculations to help the reader with this process.
Chapter five covers licensing strategies. The author urges companies to develop strategies that are compatible with their overall business plans. He raises a number of concerns that must be taken into account in developing a licensing strategy:
Strategic fit: Does the strategy complement a firm's existing product line and help it position itself favourably in its market? For example, licensed products should not compete with existing sales, so a technology may be licensed only into markets or countries where the licensor is not active.
Revenues: Projected revenues must be sufficient to justify the expense and effort of maintaining the strategy.
Financial terms: Similarly, financial terms negotiated for all parties must take into account risks and rewards at each stage of the technology development and commercialization process. Higher short-term revenues may be required for development; lower revenues may reflect market uncertainties.
Future technological developments: Strategies need to take into account potential improvement to the technology by the developer and the benefits of a longer term relationship with the licensee that may rule out additional costs for improvements or alternative agreements to commercialize later versions the technology.
Other strategic considerations: This section of the book treats primarily licensing agreement consideration, such as: whether to license the technology exclusively or to limit use or markets; how to avoid the high costs of 'stacking' (multiple technology licensing, the royalties on which may price a technology out of the market); obtaining licenses for future improvements; including the need for technical assistance in the agreement, structuring royalties (eg what are the relative benefits of (a) fixed royalty on each product sold, (b) percentage of value, (c) percentage of profits, (d) percentage of costs-savings); sublicensing, which may result in a loss of control by the licensor; and antitrust and restraint of trade issues.
The chapter also devotes some attention to the special circumstances arising from licensing technologies from universities. In particular, the fact that these usually concern untested early-stage technologies for which IP may not have been carefully protected due to the emphasis by academics on publications, may create problems. Similarly, government-funded federal laboratories, often have early stage technologies, but in this case the IP may be better protected, although companies licensing from federal labs and universities have to take into account the fact that both often retain a royalty-free license to the technology for their own use.
Chapter six aims to focus on technology marketing. Marketing pre-existing technologies in the author's view emphasizes assessing what he calls the 'marketability of technologies', through an evaluation of considerations similar to those used in technology assessments. The emphasis is classic technology push: if financial projections indicate a substantial financial return from commercializing the technology, it is deemed to be marketable. The existence of a market need is also defined in economic, somewhat circular, terms, as providing a cost or competitive advantage which will make commercialization of the technology viable. There is no evidence in this chapter on the increasing need to assess the capability of technology to address sociological, cultural, behavioral, environmental or other needs of its intended users.
Moving quickly from the assumption that if a technology sells, it is marketable, the author focuses on criteria for identifying potential licensing partners. Among the qualifications such partners should possess are adequate technical capability to understand and effective develop and manufacture the products; commitment to commercializing the technology, a good strategic fit with the licensor's corporate culture and goals; and adequate marketing and distribution capability. Stages in the negotiation process, including contacting a potential licensee and signing a nondisclosure agreement are considered part of the technology marketing process, as is promotion of the technology through trades shows, publications and trade organizations. This chapter is possibly the least helpful in an otherwise very useful book.
Chapter seven offers valuable tips on negotiating and drafting agreements. Qualities of good negotiators are outlined, including courtesy, sensitivity, flexibility, responsiveness and a positive approach. The chapter offers some suggestions for structuring agreements, and it focuses in particular on software licenses that address piracy issues. The chapter offers a flow chart of actions to take in dealing with patent infringement, with an assessment of the escalating costs of a continuing response.
The book concludes with Chapter eight on post-agreement activities, in particular administrative activities associated with the preparation, delivery and accounting of royalty payments and IP protection and maintenance and technical activities associated with technology transfer, development and trademark quality control.
Publisher: John Wiley & Sons, 605 Third Avenue, New York, NY 10158-0012, or
John Wiley & Sons Australia, PO Box 174, North Ryde, NSW 2113
RRP A$120
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