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Q. 2: You work for a small company that has an innovative low-cost production method for laser
disks. A Japanese firm approaches your CEO to license the technology. The CEO asks you to
write a report detailing the risks and potential benefits of this deal.
1.WHAT BENEFITS WE CAN GAIN BY LICENSING .
1.Excess capacity can be used to produce new products or technology under license.
2.If workers are currently employed at less than capacity, their excess time can be devoted to work
in the production of new licensed products.
3. WE can effectively broaden or diversify our market position by licensing a new product in a
field offering good growth potential.
4.WE can typically expect to have in production a new, licensed product in from 12 to 16 months
after initiating your search. This includes time for researching potential licensors, making contact
with them, reviewing the product opportunities, negotiating the license agreement and
implementing the production of the new product. In many cases, this time frame can be shortened
significantly.
5.If WE do not want to merge with another company or if you simply cannot justify an
acquisition, licensing new products offers an excellent form of corporate growth.
6.If our possibilities for growth are limited by a small R&D budget, going outside your
organization to license a product from another company can fill this innovation gap at a minimal
cost. If our R&D efforts are on long range products, licensing offers a chance to quickly introduce
new products and technology.
7.If our current products are successful and you have good marketing capabilities, you can
capitalize on that by manufacturing and marketing under license new products compatible with
your current ones which can be easily integrated into your existing marketing program.
8.In many cases, a product produced under license has already met with success (especially an
international opportunity) and has a track record to offer in its home country. The fact that a
licensed product was developed in another country can lend prestige to your home market sales
efforts.
9.By producing products under license, you take advantage of other companies doing your product
development work for you. It has been found that you can acquire the rights to a fully developed
new product under license for as little as 10% of its actual development costs.
10.When our new products come by way of internal R&D, our cash expenditures are up front.
These expenditures are substantially at risk since WE cannot be certain that the results of OUR

R&D program will be successful, let alone marketable. When products are produced under
license, their costs to you are usually paid in the form of royalties based on products sold.
Therefore, your cash flow position is considerably improved.
These are just a few of the more obvious benefits of licensing new products and technology. A few
of the others can include an increased level of engineering expertise and sophistication gained
through the licensed technology, introduction to on-going sources of new products and technology,
exposure to joint venture, acquisition and equity investment partners, increased company morale,
possibilities for cross-licensing, etc.
Licensors with experience in the field of research and product development may find it more
efficient to license out new products rather than take up production themselves.
Licensing out may be used to gain access to new markets that are otherwise inaccessible. By
granting the licensee the right to market and distribute the product, the licensor can penetrate
markets it could not otherwise hope to serve.
A licence agreement can also provide a means for the licensor to gain rights in improvements,
know-how and related products that will be developed by the licensee during the term of the
contract. However, this cannot always be demanded as a matter of right by the licensor and in
some countries there are strong restrictions to the inclusion of clauses of this type in licensing
agreements.
An infringer or competitor can be turned into an ally or partner by settling an IP dispute out of
court and agreeing to enter into a licence agreement.
A licence may be essential if a product sells best only when it is incorporated in, or sold for use
with, another product, or if a number of IP assets, for example, patents owned by different
businesses, are required simultaneously for efficient manufacturing or servicing of a product.
Last but not least, a licence agreement allows the licensor to retain ownership of the IP and at the
same time to receive royalty income from it, in addition to the income from its own exploitation of
it in products and services that it sells.
THE RISKS INVOLVED ARE :
The risks of licensing out include the following:
A licensee can become the licensors competitor. The licensee may cannibalize sales of the
licensor, causing the latter to gain less from royalties than it loses from sales that go to its new
competitor. The licensee may be more effective or get to the market faster than the licensor
because it may have fewer development costs or may be more efficient.
The licensee may suddenly ask for contributions, such as technical assistance, training of
personnel, additional technical data, etc. All this may simply prove too expensive for the licensor.
It is important that the licence agreement clearly defines the rights and responsibilities of the
parties, so that any future disagreements can be quickly and efficiently resolved.
The licensor depends on the skills, abilities and resources of the licensee as a source of revenue.
This dependence is even greater in an exclusive licence where an ineffective licensee can mean no
royalty revenue for the licensor. Contractual provisions for minimum royalties and other terms can
guard against this, but it is still a concern.
A licence agreement can be disadvantageous when the product or technology is not clearly defined

or is not complete. In such a case the licensor may be expected to continue development work at
great expense to satisfy the licensee.