A License to Steal

There are many options a senior manager has to increase the rate of growth for a "hot" product or service -- sell it, franchise it, develop distribution, set up outlets yourself, joint venture, web-based sales -- the list is lengthy, the options seemingly endless.

One method you might be consider is to license your product.  For those who are unfamiliar with a license, it grants the licensee the rights to manufacture and sell your product in a particular region, in a particular configuration, or to a particular market.  The first of these is certainly the most common use of a license agreement -- where small to medium-sized firms can extend the distribution of their product/service to geographic areas they either don't want to personally serve, or won't get around to serving for years.

The problem with the license is that when you provide your licensee the intellectual property needed to replicate your product/service, you're essentially giving them the keys to the castle.  You're arming them to become a future competitor.

A number of years ago I worked for a company that had engaged in four license agreements some time in the distant past (at least four that I knew of, there could have been more).  It's interesting to note what happened with each of these agreements over time.

One license agreement was in the former USSR.  That was the easiest for the company to deal with as during the fall of the Soviet government the market for the product collapsed, and the licensee went out of business.  Without a significant domestic market, attempts to restart the company were not successful.

A second licensee was in Africa.  That company struggled with profitability due to a bloated overhead structure, but did succeed in dominating the African market.  Eventually, our parent company formed a joint venture with the licensee, and we took effective control of the firm.  Would it have been better than simply starting over?  Debatable.

A third licensee was in Brazil.  This company went into bankruptcy during an economic crisis, and once again, the our parent firm eventually concluded a joint venture with the post-bankruptcy entity.  Had that not happened, we would have effectively handed the market to local firms, including the former licensee that was now lean and mean.  Arguably, the price paid for the JV was high, but in retrospect it turned out to be a timely and profitable move in what was to become the most important offshore market for the product.

The final licensee was in the middle east.  Because of some of the licensee's business practices, it was decided a joint venture or purchase of the firm wasn't an option.  Once the license ended, this "partner" stole our product designs and technical know-how, and began selling a competing product.  Within a couple of years, they were entering some of our core markets using a "same as, only cheaper" marketing strategy.  They also managed to wrest away a few solid employees that formed the core of their offensive team.

So in three out of four cases, the licensee became a competitor which required either an expenditure of significant capital to counter, or a market-based reaction to combat.  My lesson learned here is to avoid license agreements like the plague -- at least with respect to your core products or services.  While they may give you a boost in short term sales and profits, you are giving birth to future competitors in the process.


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If you enjoy the ideas presented in my blog posts, then check out my other writing.

Non-Fiction:  NAVIGATING CORPORATE POLITICS (released 7/19/12)

Corporate Thriller novels: LEVERAGEINCENTIVIZE, and DELIVERABLES.  These are all based on extensions of my basic experiences in the world of corporate management.