FanCraft: Auto-reply to game reviews and engage your players with AI. Start Your FREE Trial Today!

The Economics of IP Licensing

Fil Robinson, BD Manager IP Licensing | Yodo1

When you think of licensing… think of a Happy Meal!

Licensing. It’s a term many of us have heard tossed around, but may not know what it actually is, or the huge role it plays in the world of business, entertainment, food, and fashion.

Since becoming the IP licensing Manager at Yodo1, many people have asked me “What do you do?” or “What is licensing?” Initially, I tried numerous variations of the formal business definitions, such as “I work with companies to make business agreements, whereby a company authorizes another company the right to use its IP or brand for a set period of time.”

I soon found that lines like these weren’t relatable to most people, and so to keep things simple, I decided to use the analogy of a McDonald’s Happy Meal. “Every month or so, McDonald’s has a new toy, usually based on a children’s movie, TV show, or toy brand, which gets included in a Happy Meal. My job is to accomplish that, but for different video games instead of Happy Meals.”

The Economics of IP Licensing

Once you start to look, you’ll find the Happy Meal licensing analogy all around you, in every facet of consumer products and merchandise life. From limited-edition cars to board games, toys, and fashion, examples are everywhere. The images below are just a small showcase of the numerous and unique products which can come to life through licensing agreements.

showcase of image through licensing agreements 1

SpongeBob Kyrie 5 via Nike

showcase of image through licensing agreements 2

Via Star Wars

How licensing works

In this article, I will be looking into how licensing works, especially within the context of the gaming industry, and its future potential.

The basic concept of licensing is this: one party/company grants another the right to use their IP or brand for an agreed-upon period of time, just like a Happy Meal. You have the licensor and the licensee. The licensor (e.g. Disney) is the owner of the IP or Brand and decides who gets to use it for a set period of time (the licensee). The licensee (e.g. McDonald’s) is the party/company that uses the granted license to make a new product inspired by the IP or brand. Aside from the obvious advantage to the consumer in the creation of some seriously cool products, there are many benefits to both the licensor and licensee from this agreement-some are outlined in the image below.

How licensing works Business models

Business models

The process

  1. The process of creating a license agreement begins when a licensor or licensee approaches the other (usually, the licensee will approach the IP/brand owner) with an idea of how they would like to use the IP/brand for a new product or project—be it physical or digital.
  2. If both parties agree on the concept and the rules governing the development and launch of the product, then they move on to the commercial model for the agreement.
  3. There are many different commercial models that can be implemented when concluding a licensing agreement. However, the three most common are Royalties only, Royalties + Minimum Guarantee (MG), and Flat Fee.

 

Model 1: Royalties only (with no Minimum Guarantee)

A royalty is a binding payment made to an individual or company for the ongoing use of their assets (including IPs or brands). Licensors have a right to receive a payment for every product sold related to their IP. The licensor and licensee negotiate and agree on what percentage each party should receive for every IP-related item sold (this is commonly known as Revenue Share).

This model is popular for licensees as no capital investment needs to be paid to the licensor upfront.

 

Model 2: Royalties with a Minimum Guarantee (MG)

Royalties with a Minimum Guarantee are similar to royalties, but require the licensee to guarantee an agreed amount of royalties to the licensor. Even if the total royalties do not reach the agreed amount, the licensor will be guaranteed that money. The MG amount is usually based on the IP and how the licensor values it. It’s not fixed and so can be negotiated between the licensor and licensee. It is normally paid upon signing of the agreement (though it can be split into multiple payments), so it’s an important financial investment for licensors.

MGs are recoupable against royalties, so once the event takes place and royalties are generated and calculated, the MG is deducted and the remaining revenue is paid. So net-net, if the event goes well, everyone achieves a successful outcome: The licensee will recoup the MG with revenue from sales and the licensor will receive more royalties beyond the MG.

 

Model 3: Flat fee (licensing fee)

The Flat Fee model requires the licensee to pay a fee (which, again, can be split into several payments) to the licensor for the use of the license for a specific period of time. The flat fee price is negotiable between the licensor and the licensee. The fee is non-recoupable for the licensee. In this case, the outcome of the event is less relevant for the licensor as they are not receiving royalties for any sales related to the IP.

The flat fee model is often a good option for a licensee on their first IP collaboration, as they will not be required to provide a licensor with a highly detailed report of sales based on the IP once the collaboration is complete.

 

Trends in the licensing industry

With these three commercial models used as a basis for many licensing deals across multiple industries, huge revenues are being generated, with nearly unlimited potential. In the 2021 fiscal year, $260.8 billion in revenue was reported (sold at retail) based on the top 88 companies who submitted to License Global’s top Global Licensors Report 2022. This was an increase of 28.35% from $203.2 billion over the previous year.

Entertainment licensors were the top-performing licensing sector in 2021, with many of their IPs being the top media-performing IPs of 2021. Many of their IPs and the licensees (game studios within the entertainment licensing sub-sector of gaming) have been used to drive growth and revenue within the entertainment licensing sector overall.

Entertainment licensors were the top-performing licensing sector in 2021
Top Global Licensors by category

IP licensing in mobile games

Licensing in gaming has been around for decades (since the 1970s), but its growth and revenue generation in the last decade has grown exponentially. Mobile games have been at the forefront of this. The development of mobile technology and free-to-play games have been major factors driving this growth, according to the 2022 Newzoo IP Mobile Games Report.

Developers usually choose to incorporate IPs into games in one of two ways:

Timed events/DLCs such as the recent Last Shelter: Survival x The Walking Dead or Top War x Pacific Rim, have brought IPs into an existing game for a limited period of time, or standalone games (brand new games), which are developed from scratch based on an IP, such as Transformers: Earth Wars or Monopoly Go.

IP licensing in mobile games 2

The image below reflects the growth in IP-based games (based on standalone IP-based mobile games) developed and launched by game studios (licensees) year-on-year.

Note: ​​The slowdown of standalone IP-based games in 2021 can be attributed to Covid development delays and the trend towards more live service games (like Fortnite, etc, which are games continually in development that were initially released a while ago).

Number of IP Based Mobile Games Launched Each year

Via Newzoo

The combination of mobile games and IPs has become very popular and powerful, with IP-based games being the most downloaded and biggest revenue-generating games in the mobile sector throughout 2021 (as shown in the images below). Marvel in particular is a great example of how a licensor with a big IP can do very well when incorporated into top mobile games (such as Strikeforce or The Game Awards 2022 Mobile Game of the Year Marvel SNAP).

Top 10 Ip Based Mobile Game FRanchises by downloads

Via Newzoo

The future of game licensing

Licensing within the gaming industry is only set to keep growing. The continued development of gaming technology (e.g. VR, AR), innovation, and the numerous benefits for both the licensor and licensee, as outlined in this article, ensures that new ideas for collaborations will continue to come to the fore. The success of entertainment licensor’s IPs/brands (including game studios) has attracted the interest of licensors in everything from fashion, food and beverage, to sports and corporate brands across the world—everyone wants in on the potential for growth and revenue generation. Game studios who’ve seen this explosion of success amongst their fellow studios that have engaged in IP licensing also want to join the party.

At Yodo1 we bring a decade of industry-leading experience to the table to assist both global IP licensors and game studios to achieve successful IP gaming collaborations. Are you ready to dive into the world of IP licensing? Reach out at BIG@Yodo1.com to learn more.