A startup is an institution that requires more than just an “idea” to succeed. At the initial stage of a startup, management tends to focus on obtaining adequate investment capital, marketing and overall, how to strategically execute business ideas. However, the most common mistake a startup makes is failing to develop and implement a well-thought-out intellectual property strategy. Trademarks, copyrights, patents, and trade secrets are all becoming more valuable as competition among companies intensifies.
Specifically, trademarks are key assets for building a brand. According to the Lanham Act, 15 USC §1127, a trademark is any word, symbol, or device, or a combination thereof, (1) used by a person, or (2) which a person has a bona fide intention to use in commerce and applies to register… to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown. A trademark must be: distinctive, non-functional, and used in commerce, and may be in the form of words, logos, symbols, designs, or trade dress, such as product packaging (15 USC §1051 and §1052). Once registered with the United States Patent and Trademark Office, trademarks help the consumer identify the source of goods and/or services, and prevent consumer confusion. A federally registered trademark provides the registrar with presumptions of ownership and the exclusive right to use the mark throughout the United States on or in connection with the goods and services listed in the registration (15 USC §1057(b)), so long as it is continually used.
Consumers’ purchasing decisions are highly influenced by trademarks and their brand’s reputation. Trademarks can be licensed to third parties on an exclusive, sole, or non-exclusive basis. Licenses are contracts that transfer intellectual property rights from the owner of the rights, the licensor, to a third party who wants to use them, the licensee. For the licensor, licenses can generate significant revenue streams from the royalty payments. For the licensee, licenses can enable it to sell superior products in the marketplace. In order to better understand the impact a licensing agreement can have, think about digital media.
Since the launch of the first gaming console by Nintendo in 1985, video games have become a global industry worth billions of dollars. From the beginning, developers have incorporated licensed material into their games through the use of recognizable brands and technologies to appeal to a wider audience. The computer code underlying a game fused together with creative artistic expression appeals to consumers across the globe. While hardware companies such as Sony, Nintendo, Apple, and Microsoft and publishers such as Electronic Arts (“EA”) continue to dominate, advances in technology have given new developers the potential for growth. However, developing a strategy to secure the intellectual property rights in their work is what drives an idea into a marketable product and a successful business. Trademarks protect the names and logos associated with a game, and without the appropriate rights and licensing agreements, the value of their work may be at a minimum.
For example, in 1982, former Apple employee Trip Hawkins saw an opportunity in the growing home computer industry. He published non-game titles and software for Amiga, a premier home computer at the time. Hawkins saw an opportunity and believed the Amiga, “with its comparable power, sound and graphics, [would] give EA and the entire industry a very bright future.” It did. What was established with a small personal investment, has grown to become a leading developer of video games, content, and online services for gaming consoles, mobile devices, and personal computers. Without initially licensing its computer games and software to Amiga, Nintendo, and other console-game publishers, the EA brand that is so well-known today may not have ever come about. EA has made several large sports licensing deals, including an exclusive agreement with the NFL, exclusive first rights to all ESPN content for sports simulation games, and an exclusive licensing deal for Disney’s Star Wars properties. Using these major brands’ trademarks allowed them to tap into the ever-changing billion-dollar industry that is international sports and entertainment. The success of FIFA Football, Madden NFL, Fight Night, NBA Live, NCAA Football, NCAA March Madness, Tiger Woods PGA Tour, and NHL Hockey has come from licensing deals Electronic Arts has secured. The goodwill and fan following that major sports leagues generate has given EA immediate recognition in the gaming market. Whether being the licensee or licensor, EA’s intellectual property has been the key contributor to its success.
So, why are licensing deals crucial to any company’s success? Simply put, they generate money and build brands. A licensee will likely pay the licensor a royalty in exchange for the right to use the intellectual property rights. The appropriate royalty rate may vary from product to product and industry to industry, but a royalty is a small price to pay for what could turn a company into an international phenomenon. Trademarks of popular companies or sports teams already have huge consumer recognition and appeal. When a business model is already successful and has a proven trademark, replicating that trademark on a new business can be enormously successful, like it was for Electronic Arts. The trademark of a well-established business or product immediately adds appeal to an otherwise generic one, and is a means of distinguishing oneself in the market. Licensing is an effective way to extend the licensor’s brand, while the licensee’s products gain exposure in different markets allowing them to build their own goodwill.
The business benefits of a trademark license include an additional revenue stream, territorial expansion, benefit from another’s sales or marketing capacity, new channels of distribution, and developing strategic partnerships. When a video game developer and a sports league team up to produce a sports simulation game, it is not simply licensing the use of a mark, but creating a product that is a “win win” for both of the companies.
A small business may not yet have intellectual property it can “rent” to major companies. However, if it taps into a reputable brand and establishes a licensing deal it can see sales increase dramatically while it continues to develop its own brand and good reputation. A company’s long-term value is the longevity of its brand. If a new company hopes to expand, sell, merge, or raise funding, licensing deals are a good place to start.