Trends in Licensing of Media and Technology - Current Perspectives from Silicon Valley
by David B. Hoppe
Access International Law Group
Many entrepreneurs involved in technology and new media find that licensing is the best way to develop current revenues and establish a user base. Much like venture financing terms, however, licensing terms ∁Esuch as the amount and structure of royalties payable by the licensee, and the level of service expected of the licensor ∁Efluctuate according to market conditions and other factors. What kind of terms can emerging companies offering to license their technology or content, or seeking technology or content to license, expect to receive today? This article takes a brief look back at the changes that have occurred recently in the market for licensing of technology and media.
Licensing During the Internet Boom Years
Not surprisingly, the years 1998-2000 saw an explosion of licensing activity in Silicon Valley. This resulted primarily from a high activity level in the technology sector, but also from the fact that many companies were developing innovative technologies in high demand by the market, while lacking the resources and experience successfully to commercialize and exploit the technologies. At the same time, many established companies wished to participate in these new markets, but lacked either the culture of innovation or the R&D infrastructure to develop the technologies themselves.
With respect to content, there were suddenly entirely new media channels, with audiences growing at exponential rates ∁Ethe internet and, later, digital music and video. The new media were controlled for the most part by new companies, without existing content libraries.
In both cases, the result was often larger companies in established industries scrambling to enter into licensing relationships with smaller “new economy Ecompanies. This led to some peculiar partnerships, between Silicon Valley startups led by 24-year-old men with long sideburns who prided themselves in their unconventional cultures and business practices, and “old economy Ecompanies, whose price of admission to this exciting new world was an investment of a few million dollars in Series B Preferred Stock. In many cases, neither of these partners particularly liked each other, and the dysfunction that characterized many of these licensor/licensee/investor relationships often became very clear as the equity values stopped climbing and then began to come down.
Ultimately many of these license relationships ended in bankruptcy court, with the larger company not only having lost everything it invested in that Series B Stock, but also wondering what was going to happen to that technology it paid so dearly for.
Developments Since the Crash
Not surprisingly, the dramatic changes in the technology and new media sectors over the last few years have resulted in changes in market expectations for licensing terms.
First, there have been changes in the types of companies that are now in the technology and content licensing markets, as licensors or licensees. Until recently, there were much fewer transactions being done involving startups, and in particular fewer deals involving internet advertising or e-commerce. It appears, however, that as the technology and media markets have stabilized and begun to recover, more and more early-stage companies are finding opportunities to license their technology and content to larger licensees.
However, smaller companies that are seeking to obtain access to technology or media content as licensees in the current market are likely to find that it is difficult or impossible to find licensors that are willing to accept equity instead of cash in payment of royalties. As a result, there are less so-called “strategic alliance Etransactions being done, and less revenue-sharing deals as well. It is still often possible, however, through some creative structuring, to defer cash royalty payments or otherwise lighten the burden of these obligations on an early-stage licensee company.
How has the balance of power shifted between licensors and licensees over the last few years? The decline in early-stage company valuations and resulting difficulty in obtaining financing beginning in 2000 created a situation in which larger companies seeking to license technology or content had considerable bargaining power. This forced the smaller-company licensors to offer concessions on price and other terms, as well as better service packages. Licensees were also often able to demand “MFN Epricing terms (under which they would be assured of the best possible terms offered by their licensors), caps on future price increases relating to service or upgrades, and better maintenance and support.
Also, since smaller companies were finding it much tougher to get funding, license arrangements often became a critical source of revenue ∁Eeven resulting in some so-called “crown jewel Etechnology licensing arrangements that probably wouldn’t have been done a couple years previously. And some small technology companies that were really focused on being acquired but were not willing to sell at lower prevailing valuations entered into licensing arrangements as sort of an interim arrangement until valuations increased.
What Terms are Available Today?
The general consensus in Silicon Valley is that conditions in the technology and media markets continue to improve, and the result is more opportunities for startup companies with interesting technologies and content. It appears that licensing terms are reflecting these improving conditions, with smaller-company licensors gradually regaining some of the ground they had lost following the crash in 2000. In addition the transactions being done today seem to reflect better judgment than those done a few years ago, which hopefully will result in more successful long-term licensing arrangements from which both licensors and licensees will benefit.
David Hoppe is an international business lawyer and the founder and principal of Access International Law Group (www.ailawgroup.com), based in San Francisco and Silicon Valley. David has several years Eexperience working in Japan and assisting Japanese clients, and travels to Japan often. David may be contacted at [email protected].