Many businesses deal in what has become known as "intellectual property." Intellectual property consists of ideas, designs, trade secrets and practices, as well as patents, copyrights and trademarks that you own.
Licensing is the main way that ownership of intellectual property is shared. For example, books are licensed to filmmakers, films are licensed to video cassette distributors, toy designs are licensed to manufacturers, promotional advertisements are licensed to local TV stations and inventions are licensed to manufacturers.
Another way that intellectual property can be made available to others, of course, is simply to give it to them. A restaurant can make its recipes available to its customers, a computer programmer can post a program online for public use and an author can give away his poem.
Many businesses, of course, neither license nor give away their legally protected property but try to monopolize it for their own gain. The world is full of secret formulas, patented inventions and fiercely defended trademarks. Like other sorts of secrecy in business, most businesspeople never question their monopolistic practices.
They should. A small business that tries to monopolize intellectual property treads a very dangerous course. To illustrate this point, let's look at a big business example of a product that most people are familiar with.
In 1977, RCA developed a video player requiring a specialized video disc. It did not license this product to others and tried to monopolize what it correctly saw as a phenomenal new business. Unfortunately for RCA, Matsushita and Sony developed videotape players that produced similar results (the Beta and VHS systems). Both were licensed to many manufacturers. By 1983, RCA's basically excellent product was so isolated in the marketplace that the company canceled it. A few years later it was clear that of the two surviving systems, the one which had been licensed most widely (the VHS system) was scooping up the lion's share of the business.
There are lots of similar examples of companies refusing to license their intellectual property losing out to others who were more open. Audio tape is one, where reel-to-reel and eight-track systems lost out to small cassettes because the Dutch Philips company licensed the systems for making and playing the tapes to virtually anyone interested at a very reasonable rate.
Two Internet businesses offer the best and most recent examples. The Web-browsing boom was virtually created by the founders of Netscape who gave their Web browser software free to consumers and only charged businesses for the licenses. The Internet server business has been revolutionized by Linux, a free software program that has become a major force in the formerly closed server market dominated by Microsoft. Linux is served by the community of "volunteer" program mers around the world and by commercial businesses that have also grown up to provide service to large corporations.
What is the moral of this for small businesses that develop intellectual property?
Simply that those who are most open to including others in what they are doing are far more likely to prosper than those who don't.
The late Andrew Fluegelman, formerly editor of PC World and senior editor of MacWorld, prominent computer magazines, authored a program to allow certain types of computers to talk to each other, called "PC Talk." Instead of selling this program, Fluegelman gave it away, in the process refining a marketing strategy now known as "freeware." Those who were given a copy of "PC Talk" were encouraged to voluntarily send a licensing fee to Fluegelman. If they did, they qualified for free program updates. The result is a computer business legend. With no advertising, Fluegelman's program became a substantial success, bringing in over $200,000 in 1984 alone. Indeed, until his untimely death in 1985, Fluegelman's total revenues from "PC Talk" exceeded the net return of all directly comparable programs, many of which were marketed with expensive advertising hoopla.
Fluegelman's program allowed computers to link to networks, which in the early 1980s were new and limited. By 1993, computer networks were beginning to grow and the Internet had several million active users. Into this environment stepped one of the most astounding marketing achievements in history. Marc Andreeson started distributing, free, a program called Netscape. Netscape was elegantly simple at the outset and allowed good graphics, direct access to files that were made public on the Internet and easy movement to other distant files. The new environment was quickly called the World Wide Web, and Netscape became the standard.
Netscape charged commercial users for its program and sold its services for internal corporate use. The company sold public shares of stock in early 1995 and created a sensation that played a direct role in lifting the whole domestic American stock market nearly 30% in one year. Then Andreeson's company achieved another historic first by generating revenues in excess of $100 million in its first year of existence.
Marketing Without Advertising deserves a tiny amount of credit. The 1986 edition of this book was the first published account of generous marketing, the RCA, Dutch Philips and Fluegelman stories.
At this point you may be saying, "Great story, but what's the point for my small business? I don't write software, splice genes or have a pantry full of secret recipes." While the issue of licensing and the principle of generosity in marketing doesn't come up often for small businesses, something very similar does commonly occur for all providers of goods (and sometimes, services) under the guise of exclusive marketing agreements and exclusive territory agreements.
We have seen many businesses confronted with a retailer or wholesaler who says, "I'll carry your product only if I can have an exclusive agreement in this area for selling it." At first examination, it makes sense: The retailer or wholesaler may make a greater effort to sell it if she has an exclusive deal. In reality, the small manufacturer, artist or craftsperson faces the same situation as do giants like RCA and Philips. The exclusive agreement makes it much harder for your ultimate clients to find and buy your product or service because it inevitably results in severe restriction of the many ways it can be sold, displayed and marketed. Indeed, no matter what the incentive, it is almost never worth signing an exclusive agreement of any sort. Sometimes this means making a tough decision to turn down what seems like a very lucrative deal. Do it. Never let short-term greed get in the way of long-term good business practices. ■
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