October 8, 2021
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When The Brand Warrants a Licensing Business

When building a media company, newer operators tend to bias toward advertising or subscriptions. More seasoned operators realize that choosing one over the other isn’t wise and, instead, choose both. With both and subscriptions, the focus is monetizing the content. How can we get someone to pay—either with their eyeballs or with their dollars—to consume content?

But as time goes on and as the brand becomes consistently stronger, some start to realize that they have an asset that might be worth leveraging in a low-cost, high-margin way.

This is the actual brand. The individual pieces of content, in this case, become less important than the brands that are being built by the media company.

Take Disney, for example. As a media company, it owns an unbelievable number of brands. In its Q3 earnings statement, it wrote, “Growth in merchandise licensing was primarily due to higher revenue from merchandise based on
Mickey and Minnie, Star Wars, including The Mandalorian, Disney Princesses and Spider-Man.”

And in all of those instances, Disney creates its own line of merchandise while also licensing to third parties to create products as well. Every time one of those third parties sells something that is Disney branded, Disney gets a cut. It’s really that simple.

But let’s put that into context. When that third party creates a t-shirt with Baby Yoda on it, for example, it has to design, develop, manufacture, ship, and actually sell that product. What does Disney have to do? Sign a licensing agreement. Now, I’m being intentionally flippant with how simple this sounds and there is obviously a lot of oversight on ensuring the brand is safe. But let’s call a spade a spade. In the grand scheme of things, where is Disney’s big cost in that licensing agreement?

The answer is in the creation of the brand. That costs a lot of money. Disney paid $7.4 billion for Pixar. It then spent $4 billion for Marvel Entertainment. Finally, it spent another $4 billion on Lucasfilm (Star Wars, etc.). And this doesn’t even take into consideration the Fox acquisition (more than all of these combined and then multiplied by more than 4).

And that’s just the beginning. It has to build up these various brands—Mandalorian, Spider-Man, and other characters—so that each of them is in demand by consumers. That means movies, TV shows, comics, and other cash-intensive assets.

But once it has built a brand that actually has recognition, it can then, to some extent, sit back, relax, and let the third parties deal with the heavy lifting while they cash a check monthly, quarterly, or annually.

There are obvious trade-offs to this, of course. Is there more money when you own the product from end to end? Probably. But there is also more work and risk. You have to staff appropriately when creating these products and need to have the institutional knowledge to actually achieve those goals. In the case of Disney, it has always confused me why they would license for t-shirts when they also make t-shirts. But there are examples where being a licensor might actually make sense.

So, let’s discuss a few…

A lot of this thinking about licensing came to me while I was digging into the various companies that are either being taken public via SPAC or being acquired.

Take, for example, Forbes. If we dig into its SPAC presentation, there are 19 mentions of license. On slide 22, it refers to brand extensions as, “High margin and recurring revenue streams leveraging the iconic brand.” It’s a high margin because it doesn’t have to do much work.

On slide 23, it talks about the Forbes School of Business & Technology. This is not actually a Forbes-run school. Instead, the University of Arizona uses the brand because Forbes means business. The school has generated $30M in EBITDA over time. My guess is that the University of Arizona receives a disproportionate percentage of this, but that makes sense. Forbes doesn’t actually have to do much work; just license its brand.

All told, it has licensed into 45 global publications and created 34 media and 17 brand licensees. It earns up to $500k per year per new publication license and its China Joint Venture (a requirement to operate in China) earns either $800k or 10% revenue, whichever is greater.

BuzzFeed has spent a lot of time building its licensing business. In June, Adweek reported that Tasty’s licensing partners had sold more than $250 million of branded merchandise in 2020. BuzzFeed gets a cut without having to produce the goods themselves. BuzzFeed has spread its brand so wide, it recently announced that it had partnered with California-based weed producer NUG Inc. to create a marijuana product called Goodful (after a brand it owns). In a Forbes story:

“We launched Goodful’s line of products to help our audience make small intentional steps to enhance and improve their lives,” said Eric Karp, senior vice president of brand licensing and brand design at BuzzFeed.

“We found that our audience was interested in BuzzFeed bringing them branded cannabis products, and the insights revealed that Goodful’s audience in particular was interested in branded cannabis products and recommendations. From there we connected with NUG which opened up an opportunity for us to do a real-world test and enter the market,” Karp added.

Interestingly, Karp recently left BuzzFeed to join Vox as their SVP Brand Licensing. With the number of shows and brands that Vox has, we should expect to see a growing business there as well.

If we turn and look at Meredith, which IAC just announced it was buying, it’s clear that licensing is a big part of their business. According to their Q4 2021 earnings, it generated $34 million in licensing revenue in the quarter, up from $28 million in the previous year.

But when we look at Dotdash’s numbers, there is no mention of licensing anywhere in its earnings. I know they’ve been building a licensing business for a few years now, so this omission could just be how they report their numbers. But it will be interesting to see how the introduction of all Meredith’s brands merging with Dotdash’s could create a robust licensing operation.

And finally, there’s Barstool Sports. On January 14, 2019, Dave Portnoy did his first One Bite review of Lorenzo & Sons pizza. The series gets millions of views every single month, has become a major brand, and is now moving into the licensing business. It partnered with Happi Foodi to create One Bite Frozen Pizza, which will be sold in Walmart. I consider that pretty impressive.

Now here is where I come clean…

I know very little about what goes into a good licensing deal. I went to China to commemorate the launch of CoinDesk China, but I was just a voice on stage. My colleagues did the actual work to get that deal across the finish line. But licensing did start becoming an interesting model for CoinDesk. When I left, there were localized versions also in Japan and Korea.

But in the grand scheme, I don’t actually know what goes into structuring a good licensing agreement. And so, I’d like to return AMO to the spirit of why it originally launched: for me to connect with smarter operators. If you’ve been part of licensing agreements or are a pro at them, I want to learn.

Please join the AMO Slack channel and let’s get a conversation started. How do you assess a good partner? How do you structure a good deal? How do both sides walk away happy? And if you don’t want to join Slack, please hit reply.

What I do know is that there is something very interesting in this world of licensing. For many of us running digital-first businesses, the world of atoms might be a little foreign. But taking our brands and bringing them into the real world with real things is interesting. And licensing appears to be one way of doing it.

Thanks for reading today’s newsletter. I hope you have a great weekend and I’ll see you back here, in your inbox, next week. Take care!

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