I would say this is easily the topic I’m most often asked about.
Licensing is an enigmatic beast that looms with uncertainty in the background. Everyone has a favorite Intellectual Property (IP) and would love to make a game for it right?
This is the first step in learning to slay that beast.
At its core, licensing is nothing more than paying someone else for the right to make your own product using their IP.
Many factors go into securing and producing any given license, but there are some guidelines that can help you navigate the murky waters. There are typically a few things within any licensing agreement you will pay particular attention to:
- Minimum Guarantee
We’ll go into each one in more detail later.
Before we get started, there are two terms we should explain.
Licensor – the entity that owns the license.
Licensee – the entity that is asking permission to use the license.
Why do you want to license?
Think about this one very hard. What are you going to get from a license that you can’t bring to the table yourself? Is using a license going to be beneficial enough to offset the extra time and expense?
If you have a game, and it’s good, why wouldn’t you develop your own theme?
If the answer to that question is that you want to make more money or that it will sell better with the license, you may want to rethink why you are making a game in the first place.
Licensing is not a magic bullet to sell things.
But Erik, didn’t YOU just make a game with a license?
Why yes, I did! And here is my answer to why we used the license:
THE GOONIES Playing Cards have been in the top three playing card decks that we have sold year after year. So we know there is a high demand for the property.
Also, we already had the license, so there wasn’t any additional incurred cost for us.
And most importantly, we love The Goonies and wanted to have an awesome game that we wanted to play and that we could share with fellow fans of the film.
So we teamed up with the Fleeples (Matt Riddle and Ben Pinchback) and we asked them to make an awesome cooperative card game for us. And they did…
How popular is the IP that you want? Something like Star Wars (my personal holy grail) is going to be much harder to get than, say, Gobots. Don’t know what a gobot is? Think of very sad, unemployed transformers.
The current demand is not only going to dictate availability for your category, but also how much its going to cost you. It will also have some bearing on where you sell as the target audience for each is different.
You wouldn’t sell My Little Pony in a motorcycle shop, just like you wouldn’t sell Harley Davidson merchandise in a gaming store.
You mentioned my category, what’s that?
A category is the product type that you are selling. A tabletop board game is different than a digital board game. Pants are different than shorts, or skirts, or kilts.
There is typically a limit to how many vendors a licensor will allow for any category. You wouldn’t want to make a game with a license knowing ten other companies were using that exact same theme would you?
Minimum Guarantee (MG)
This is the amount that you promise to pay no matter what happens. So if you make a product and it sits on shelves and nobody buys it, you still have to pay this amount.
The more you guarantee, the more likely you are to do something with the brand. Always look at contracts from the licensor’s point of view.
They’re looking to maximize Revenue and Brand Recognition, while trying to minimize risk.
This is a subset of the Minimum Guarantee that you pay, you guessed it, in advance. Normally paid when the contract is executed (signed), this amount can range anywhere from 0-100% depending on the contract.
The advance is applied to your Minimum Guarantee, so you’ll deduct that amount from the total that you owe the licensor over the life of the contract.
The amount is normally based on the amount of risk that is assumed. If you’re a small company without a strong track record, you’ll pay more. It’s also a way for you to show your commitment to the license if you can afford it. Kind of like buying a house. If you put down a 50% deposit, you’re probably not going to bail on the other 50%.
How long do you want the license for? You probably want it forever, but that’s a really long time for anyone to commit to something.
Instead, you’re more likely to get a contract term of 2-3 years. Remember that you’ll have to manufacture, market, and sell your product during this time so be sure you can make your minimum guarantee.
This is the percentage that the licensor gets per sale. So for widget A you may pay them 15% on the sale price.
But wait, what’s the sale price? Is that the price the customer pays or the price that I sell to a distributor for? Does that include my shipping costs?
That all depends on how it was setup in your contract. You may have different percentages based on wholesale, distributers, direct to consumer, FOB, etc.
There are a lot of terms in this particular part of the contract that you really need to understand. Terms like FOB and landed.
The important thing about royalties is making sure you can still make money at the end of the day. Let’s say you have a $10 game that you sell to distributors at 60% off so you make $4. Out of that, you may need to pay a 12% royalty fee, which is $0.48. If that game costs you $2 to make and $0.35 to ship, your total profit on that is $1.17 (assuming you don’t have any overhead expenses like artwork, design, advertising, etc.). How many games would you have to sell at $1.17 to make it worthwhile? How many games would you have to sell to make enough to pay your minimum guarantee?
“Hey Disney, I want to make Star Wars Playing Cards and I know I can sell them, all my friends love Star Wars.”
Probably not going to cut it. They’ll want to know who carries your current products.
What stores are you in? How many units do you currently sell? At what price? What is your annual revenue? How much of that comes from licensing?
It’s a bit of a Catch-22, you have to already have had some success in order to get a license to be more successful.
This goes hand-in-hand with distribution. A licensor doesn’t just care about the money, they want to know how you are going to help boost their brand and not just the other way around. What are you going to do that is going to help amplify their signal in the marketplace?
Sometimes there will be a clause that you need to make a monetary contribution to the licensor’s marketing budget. This is usually a percentage in addition to the royalty that is already being paid.
Have fun with this one.
So you do well selling on Amazon in the US but you only sold five units in Singapore last month on your website?
You’re probably only going to get the US as a territory. A territory is where you can sell your product.
Remember all those questions you had to answer above in the distribution section? You’ll need to be able to answer that for each and every territory that you want to sell in.
Territories are typically broken down by continents and/or countries. So it will look something like the following:
- South America
- EU (with additional fragmenting)
- Australia / New Zealand
By no means a comprehensive list, but should give you an idea.
You’ll need to develop your global presence with other products to help get worldwide coverage.
There is a loophole though. There are distributors in these territories that CAN sell your products, so sell directly to those distributors instead of trying to obtain the licensing rights. Ask your contact about this, they probably won’t volunteer it.
There are a lot of different types of business insurance. Some cover your product in case someone is injured by it. Some cover lawsuits from staying stupid things online. Some cover lawsuits from infringing on copyright or trademarks.
Some of these are pretty standard for a licensor to ask for and have themselves added onto the insurance policy.
Depending on the limits of the coverage, you could be looking at anywhere between $5,000 – $20,000 on average per year in insurance costs.
Throughout all of this, your negotiation skills and ability to present your case are going to be key factors in what kind of a deal you get. Poker is a game that you can play well by observing how others react and knowing the numbers behind the game, this isn’t much different.
You wouldn’t pay full sticker price for a car would you? If so, I have some beachfront property you may be interested in.
You’ll normally need to submit things for approval at several points in the process to be able to move forward. There is usually a concept, development, and final stage involved.
The concept is where you present your ideas. It’s good to have a lot of your layout and design work done, usually close to what you think the final product would be.
But don’t worry, legal will make sure that you have to make changes! Legal will always have input into what has to change, and it will be different and unexpected for each and every property that you deal with. Even within the same organization.
You’ll continue this process for several iterations and it could take weeks or months to get all the way through. Then finally, you’ll create the product and submit a final sample for review. This is the product as it will appear on store shelves out in the wild.
The best example of seeing this in action? Check out Beyond The Tank, Season 2, Episode 6 and watch some of the hurdles the Happy Feet guys had to go through. What they show is tame, and you’re not meeting with any account executives in person unless you’re getting them on TV.
So bottom line is, be ready to make lots of changes. Be prepared to change the design you think is perfect because there will be legal reasons why you can’t use it. And most of all, be prepared to add lots and lots of time to your timelines for approvals.
If you want to use an image that looks like one of the actors, then you need to get permission.
Sometimes the licensor that you are dealing with has the rights for these, sometimes they don’t. It’s important to ask about these upfront because it could add additional time and expense to your project.
There is a reason why you often see products for your favorite shows with people on them that look nothing like the person that portrayed them. It’s because they weren’t able to get the licensing rights or because it was cost prohibitive to do so.
Licensing is complicated. At times it can be tedious and boring. It automatically increases the timeline of anything you do and reduces your creative control.
But it can be very rewarding as well. When you are finished, with an awesome product based on one of your favorite properties, it’s totally worth it.
We can help you get licenses. We know people.
You can contact us at email@example.com to inquire about potential deals we can help broker for you.