South Africa: Doing IP Deals: Licences And Sales

Last Updated: 20 June 2018
Article by Waldo Steyn

Most Read Contributor in South Africa, September 2018

With intellectual property ("IP"), the focus is often on protection (generally in the form of registration) and enforcement, which often takes the form of an infringement action. Yet, there is also always a great deal of transactional activity taking place in respect of IP assets. This activity tends to fly under the radar, but two recent deals have made the news. These deals are examples of two of the most common IP transactions: licences and sales.

Licensing: Starbucks and Nestlé

It's the sheer size of the licensing deal between Starbucks and Nestlé that's put it in the spotlight – a reported USD7.5-billion fee. What's happened here, is that Starbucks has granted Nestlé a worldwide licence to market, sell and distribute coffee, tea and juice under the Starbucks brand.

So, who gets what? Well, Nestlé gets the right to use a brand that absolutely everyone knows, although generally in the context of coffee shops rather than branded coffee. Starbucks, on the other hand, should acquire a significant revenue stream, as Starbucks branded coffee starts selling in supermarkets throughout the world. It's a win-win, as they say!

In an article about the deal that appeared in the publication Marketing Week on 8 May 2018, Mark Ritson gives some fascinating insights into the commercial aspects of trade mark licensing. Ritson talks of the concept of "core competency". This term relates to the fact that the most successful companies develop a small set of core competencies. The trick, he says, is knowing what your competencies are, and, as importantly, what they are not. It's these non-core competencies that should be outsourced: "Strategy is deciding what not to do."

Relating this thinking to the deal, Ritson says that Starbucks is very good at marketing products internationally through its own channels. What it doesn't have is much experience of selling through wholesalers and retailers and, as a result, retail sales of Starbucks branded coffee have been poor. Nestlé, on the other hand, knows a great deal about retail. Nestlé has now added a valuable coffee brand to its stable, a brand that also gives it a significant footprint in the USA. The deal makes perfect sense for both sides.

Ritson is clearly a fan of licensing, pointing out Disney earns USD3.3-billion annually in royalties, and FIFA USD205-million, but he acknowledges that there are sceptics, describing brand licensing as "one of the most vilified and valuable concepts in brand management." He goes on to say this: "Too many marketers poo-poo licensing as a bad branding move. I defy them to turn down millions in pure profit every year."

Ritson says that licensing deals often break down because of short-term greed on the part of the licensee. This can be down to the fact that licensees and licensors often see things differently. A licensee may have a short-term perspective and therefore see the brand as a cash cow. A licensor like Starbucks, on the other hand, sees its brand as "the single most important, long-term asset on its balance sheet."

What's interesting about licensing, says Ritson, is that it's barely visible, which is why it's so seldom in the news: "Despite the integral nature of licensing to brand success, customers literally have no idea its taking place." Most customers will think that "Starbucks sent some of its beans from its café down the road to Sainsbury's."

So, what does a trade mark licence agreement look like? It can be a lengthy document, but there are some typical features. There will be a clear identification of the trade marks being licensed and the actual scope of the rights to use the licensed trade marks. At the heart of every trade mark licence is the ability of the trade mark owner to control the quality of the goods or services. Without this, the trade mark can lose value altogether. The financial arrangements will be spelt out in detail, and payment will often be in the form of regular royalties. Another key feature is enforcement. As both parties generally have an interest in making sure that the brand isn't infringed, the agreement will often provide for cooperation in regard to policing.

Sale: Lenovo

There was an attention-grabbing article in The Guardian (UK) on 12 May 2018: "Lenovo, the Chinese giant that plays by the rules... and loses". Alluding to the fact that China is often blamed for not taking IP seriously, the article starts as follows: "So what happens when China plays the game fairly and buys American IP to gain a foothold in the world's biggest economy?"

The article deals with the fact that the Chinese company Lenovo took a considered decision to buy patents and technology in order to compete with Western companies. It bought IBM's PC division as well as Motorola's smartphone business. Of the USD5-billion plus paid for these businesses, some USD2.7-billion was allocated to "goodwill", so basically IP. Yet, Motorola did not prosper from its investment.

The article suggests that one of the company's mistakes was being unable to decide which brand to run with for smartphones, Lenovo or Motorola – this indecision has resulted in it being overtaken by the Chinese company Huawei. As for PCs, not only has the company been overtaken by Hewlett Packard, but the PC market has been sluggish.

Licensing or acquiring IP obviously doesn't guarantee success, but it does often lead to it. A significantly greater awareness of the actual value and utility of IP assets to businesses in South Africa could be a critical consideration in unlocking value for shareholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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