Seeing the forest for the trees

Woody Browne has worked in some facet of the licensing industry for 23 years. The three-term past president of LIMA founded Building Q, a consulting firm, in 1982. As he was gearing up for Licensing Show, Browne spoke with PLAYTHINGS' senior editor Dave Gerardi about the ups and downs of the biz.

What would you like to see improve in the relationship between licensor and licensee?

I would like to see more long term thinking. The problem is: Licensors and account executives are incentivized to take the short dollars. If you've got a partner that has terrific distribution and product development, they're going to pay you royalties, whatever the equity of the property earns. It's really not related to the guarantee. Taking the short money on a guarantee for a bad product, is problematic.

When renewal time comes and you are successful with a program, licensors say, "You got a really great deal the first time around, we want a guarantee that reflects the success you had in the business." In fact they should be saying, "Thank you very much. Let's continue this relationship so you can keep sending us checks." It's frustrating because from a licensee's perspective, "We're building a business that we anticipate we're going to get pats on the back because we're making lots of money for the licensor and property owner."

People need to turn the chairs around and ask, "What does this deal look like from the other side of the table?" That's changing a little bit. The smaller, more entrepreneurial licensors and property owners understand that if they partner with the right guys, they're going to be successful.

Will we ever see licensing percentages like those negotiated for Harry Potter anytime soon?

Very often in a phenomenon situation, the adrenaline is running so high, you start to lose your focus on logic. "If my competitor's offering 14 percent, maybe I can offer 15 percent." You have to run the numbers and ask, "Are we going to make any money at the end of the day?"

The risk is compounded by the fact that there are only a handful of big retailers left out there. Ironically, we're seeing a lot of specialty stores picking up the slack.

What are the benefits and risks of tiered royalty rates?

The manufacturer amortizes the costs of development and tooling. Maybe that accounts for five percent of my wholesale price. At some point, that five percent pays off that development, increasing my gross margin. At that point, I might be willing to increase the royalty to the licensor. That's fair. If you start at 8 and go to 10 and, if it's a home run, go to 12 because all the costs are amortized, then the company's healthy. When the percentages start at 14 or 15 and they're tiered up to 25, people get crazy.

Biggest myth in licensing biz?

Folks think it's easy. The worst are the rookies that get lucky in their first licensing effort. All of a sudden, they're experts and they spend the next 10 years losing all the money they made on their first hit. The other myth is: "My property has equity." Just because your mother, sister and spouse think your property is terrific, it doesn't mean it'll sell at Wal-Mart. Some properties go out too early. You need to develop a consumer following before you can get manufacturers to jump up and down.

Is there any one question your clients ask that you would like to answer once and for all?

"Why are they charging me a marketing fund? Where does that money go? Isn't marketing part of what the basic royalty is supposed to be paying for?" It makes you scratch your head. Licensors that fold in a basic one or two percent marketing fund with no accountability—it's like a disguised way to jack the price.

C. Woodrow Browne is principal at Building Q, a marketing and licensing consulting company.