How to Use Intellectual Property Licensing as a Secondary Source of Profit

While most developers of entertainment-related apps, such as those involving video games, television, film and music, are well aware of the profitability models that concern payment for each download, they sometimes overlook a revenue stream that is potentially even greater: licensing the intellectual property (“IP”) stemming from the app. This is known as “annuitization,” in that the revenue stream continues into the foreseeable future, exclusive of any declining download rate. Indeed, this can be a way of rounding out the brand portfolio, so that in addition to revenue from downloads, there will also be a second revenue stream from licensing intellectual property. This can include such items as toys, apparel, virtual reality games and augmented reality games, all of which often become profitable at the same time that downloads of the app are beginning to pick up steam. Entertainment vehicles such as books, television shows, music and films can also introduce new customers for app downloads, and the popularity of the app can in turn promote merchandising opportunities.

The following are five common questions relating to such licensing arrangements, with a special emphasis on the video game industry.

Five Common IP Licensing Questions for Developers

1. What is the most common way of licensing the intellectual property of my video game app?
There is no one answer to this, but an obvious example would be to create a figurine of the main character in the video game. That might involve hiring a licensing agency to solicit licensing agreements with a manufacturer and distributor who will construct and then market the figurine in various forms (a keychain version, a stand-alone child’s toy, a hyper-realistic version for adults to keep on their desk at work). In addition, our experience is that apparel is often the first foray into merchandising. The owner of the gaming app will generate revenue by receiving a royalty with respect to those sales.

2. What are the key provisions in creating a licensing agreement for my intellectual property?
There are many, but some of the more obvious ones relating to IP strategy concerning licensing rights are (a) maintaining quality control, such as through enhanced product approval rights, so that the licensed products do not impair the brand; (b) negotiating exclusivity and proper royalty payments by implementing comprehensive audit rights for the owner of the app to verify that they are being given all the money that is due to them; and (c) stipulating to a robust consent to jurisdiction clause for any disputes, so that it is not necessary to chase recalcitrant licensees throughout the world.

3. What are some of the pitfalls of entering into a book or movie deal utilizing the licensed intellectual property?
Again, there are many, but a few of the key examples are (a) giving away one set of rights in the course of securing the other, such as, for example, signing a book deal that also provides film rights to the book publisher (though admittedly, that may be unavoidable); (b) allowing the brand to be eroded through a substandard use of the intellectual property, since a poorly written book or poorly directed film can undermine not just sales, but the value of the app and other licensed uses of its intellectual property; and (c) providing rights in subsequent versions of the video game because there is always the possibility that the next iteration of the game might need to be licensed to other licensees so that its revenue can be better maximized. Obviously, there are situations in which the terms of a licensing agreement cannot be adequately negotiated because the licensor does not have sufficient bargaining power. Sometimes it is better to be informed and decline an opportunity than to proceed regardless and lose pertinent rights.

4. What is a derivative work and how does that apply to copyright law?
The federal copyright law was enacted over one hundred years ago in President Theodore Roosevelt’s administration. It has been revised a number of times, most notably by the Copyright Act of 1976, which is contained in Title 17 of the United States Code. It is based upon the Copyright Clause of the U.S. Constitution Article 1, Section 8, Clause 8.

The Copyright Act provides a creator and copyright owner with an exclusive bundle of rights. One of these is the exclusive right to create derivative work from the original. Often, enforcement of rights will come down to an evaluation of whether the alleged infringing work is an exact copy, a derivative work or is not infringing at all because it is so transformative.

5. Can I negotiate a licensing deal myself without an agent or broker?
The short answer is yes. However, there may be additional opportunities afforded to you if you engage broker or agent in the process. That said, agents are often compensated by staking a claim to royalties. It is important to read both the agency agreement as well as the licensing contracts carefully before signing them, and better yet, provide them to an experienced attorney for their review.