LICENSING & SPONSORSHIPS

When people think of licensing, usually sports or entertainment licensing is the first thing that comes to mind but there is far more to the licensing business than that. Licensing is no longer simply the domain of a few specialized people. Nowadays all major companies and the media consider licensing a significant marketing tool. One could even say that it has become one of the most powerful contemporary forms of marketing and brand extension and that it is being used in ever increasingly sophisticated ways. To clarify what the business of licensing is all about, there is a clear need for some definitions and basic terms that we feel are necessary to be explained to some degree at this point.

Licensing is the process of leasing a legally protected (that is, trademarked or copyrighted) entity known as property which could be a name, likeness, logo, graphic, saying, signature, character or a combination of several of these elements, in conjunction with a product or a product line. A property can also be licensed for many non-product purposes as well, as for example a promotion or a service, but as the Company will focus mainly on merchandise licensing, these aspects will be ignored here. Licensing is usually based on a contractual agreement between two business entities: the owner or agent of the property, also known as the licensor and the renter of the rights, and the prospective licensee who is usually a manufacturer. The formal permission to use the owner's property is subject to certain terms and conditions, such as a specific purpose, a defined geographic area, and a finite time period. In exchange for granting the rights for a certain property to the licensee, the licensor obtains a financial remuneration. The basic component of this payment is the royalty, which is a percentage of the licensee's sales of products that are incorporate in the property rights. In addition to that, a guaranteed minimum royalty, the guarantee, is usually required. The licensee has to pay this guarantee even in the face of total failure of the property. A percentage of this guarantee is normally paid as an advance.

The licensing industry is a highly lucrative, rapidly growing, multi-billion dollar annual industry. Currently, over half of the industry royalties are related to the entertainment business. At the World’s Fair in 1904, the “Buster Brown” character entered into as many as 200 different contracts placing the likeness on everything from shoes to cigarettes. Today, it is estimated that there are over 500 different licensing categories.  In 2001, licensed products generated retail sales of $75 billion in the U.S. and Canada. The largest and fastest-growing segment of the industry is corporate brands and trademarks, which produced almost 25 percent of that $75 billion. Character and entertainment licensing, both very much intertwined, captured 4.4 percent increases in 2002 (or an increase of $1.7 billion for character and $2.6 billion for entertainment), with the success of Spider-Man and the super hero genre leading the way.

BELOW IS AN EXAMPLE OF ONE YEARS LICENSING AND MERCHANDISING SALES AND EARNINGS FOR “THE SIMPSONS”

Simpsons DVD Boxed Set Sales

Annual Unit Sales                      Retail Price                Total DVD Retail Sales

1,400,000                                  $32.00                       $44,800,000

Estimated annual sales of all Simpsons licensed products

U.S. $1,120,000,000
International $276,640,000
Total $1,396,640,000

Breakdown of The Simpsons Royalties from the sale of licensed products
Wholesale percentage of retail sales 50%
Wholesale Value $698,320,000
Average Royalty Percentage 7%
Royalties Paid by Licensees of The Simpsons $48,882,400

Entertainment Licensing Market

The US is the key market licensed merchandise market. Licensing performance of television-based properties varies widely. The latest Licensed Property Benchmarking Survey (EPM Communications, Inc 2001) took a snapshot of 175 television properties airing in the US, and analyzed their licensing performance. The table below summarizes the results. Figures for individual properties can rarely be found in the public domain. As a US based publicly quoted company, 4Kids Entertainment Inc, were obliged to present in their 2001 annual report separate numbers for the income generated in the US as the licensing agent of the Pokémon property over the three year period 1999-2001 (as it represented such a large proportion of their total revenue). Analysis of the figures produces an estimate of $12.9 Billion for the value at Retail in the US of the Pokémon property. We estimate this produced average annual royalties to the owners of Pokémon of approximately $130m. This is generally acknowledged to be one of the largest and fastest growing licensed properties in the history of the entertainment industry. Peter Byrne, FOX’s executive vice president of licensing and merchandising, acknowledged to MSNBC that “[The Simpsons] is without doubt the biggest licensing entity that FOX has had, full stop, I would say from either TV or film”. Fox does not release numbers on the value of The Simpsons licensing. However FOX Home Entertainment Senior Vice President Peter Staddon stated in The New York Times in April 2003 that The Simpsons sold an average of 1.4m DVD sets per series in the US. That equates to $45m per year at retail in the US for DVD alone. EPM in their 2002 Annual Licensing Survey estimates that home video, as a category, represents 4% of overall licensed merchandise sales. This would produce annual retail sales for The Simpsons products, in the US, of $1.12 Billion. Worldwide retail sales can be estimated at US$1.39 Billion by using the % US licensing market share quoted above. Applying an average royalty rate of 7% of the wholesale (50% of retail), the value of annual worldwide licensing royalties to FOX can be estimated to be approximately US$48m.

Sponsorship Licensing

The Company is preparing brochures and contracts for its sales team to raise capital for a limited license allowing sponsorship and the sale of items at our venues as well as national sponsorship licenses. Also, we will be in contact with Pepsi, Coke and other major corporations, inviting them to attend. This should open the door for some serious negotiations about potential future venues and financing. The Company fully expects to contract with a large toy manufacturer such as Playmates Toys, Fisher Price and/or Mattel; etc.