App Licensing: The Inside Scoop from Night & Day Studios

Our feature post this week is an exceptional learning opportunity for app developers who are pursuing licensing deals for apps. Told by Erin and Nat of Night & Day Studios, this article details licensing terminology for the app world, in addition to the case study of Peekaboo Forest. Usually I set a guideline of 800 words for feature posts. For this topic there is no limit. They can write until the cows come home to that Peekaboo Barn of theirs. What a fascinating and resourceful piece – thanks Nat & Erin!

Erin Rackelman, our marketing director and wiz at setting up and thinking through deals, begins this post with two stories about licensing: 1) how Night & Day Studios got involved in licensing, and 2) a case study of our latest licensed app, Peekaboo Forest. The second half of this post is written by me, Nat Sims, Night & Day Studio’s creative director and deal-closer. I follow Erin with some quick, rough definitions of key terminology from the licensing world.

Erin

We got interested in licensing in August 2009, at a garden party in New York.  I was catching up with an old friend who had taken a job in the art department of Chorion.  We were talking about apps and our success with Peekaboo Barn, and she suggested we meet some people at Chorion to discuss Eric Carle.  We began negotiating out the Carle deal in the fall of 2009 and it actually took about six months to complete.  Many of the licensing companies had never done a mobile deal before (especially a smartphone mobile deal), so there were many unknowns.  While negotiating that deal, we educated ourselves quickly on the industry and realized the terms often stretched for 3+ years, meaning if we wanted to work with any other brands, we would have to jump in rather quickly.  Land Grab!

It was fun.  We thought of every artist, illustrator, and author we loved, and what we were most fond of from our own childhood. Our customers were parents of toddlers, so we didn’t stray far from that market.  I got in touch with everyone we were interested in towards the end of 2009, just as one of the first licensed kid’s apps came out: Dr. Seuss, licensed by Oceanhouse Media, who have been doing great work ever since.  We theorized that the app market was going to get more and more flooded, and while we wanted to continue to make in-house apps, like Peekaboo Barn, the risk was very high to promote an unknown kid’s brand.  We figured a less risky road was to partner with media companies or license brands that fit with our aesthetic, and become an established company in the kid/mobile market through these projects.  In the long term we hope to invert the model and go back to doing in-house work, and potentially, starting with mobile alone, create brands that can be licensed themselves.

Licensing, like many other industries, seems to be a tight-knit group. Once we started meeting people the offers for other kid’s brands doubled and tripled. We’ve recently been in talks with networks and film studios, and plan to move into older demographics with the next few acquisitions.

Peekaboo Forest is an interesting example because we took our already established brand (the Peekaboo series, for which parents write us daily requesting more animals and versions) and combined it with the Charley Harper brand.  One of our teams here in Portland made the app: programmer, graphic designer, interaction designer, sound, animation/photoshop guru, VO talent, and language translation (the app is already translated and recorded in 10 languages; we will release the additional languages this spring).  They had to create almost all the scenes through a painstaking process of collage, combining elements from multiple Harper illustrations, and adapt it to our already familiar Peekaboo flow.  

We did make some changes, the biggest being the use of four seasonal scenes with three to four animals each, instead of one single scene with 13 animals. The app has only been out for two months, so we don’t have long term data yet, but it was greeted with much excitement.  In 7 hours after Apple approved it, it became the #3 educational app in the US.  The early sales were driven just by what we did from our end: promoting it in our other kid’s apps, and getting the word out to our excited, very loyal customers. It was pretty incredible. Once we got some momentum, Apple featured it in over 70 countries around the world. It was a combination of two strong brands, a great production team, and some careful thinking about promotion.

Nat

The time Erin mentions above when we educated ourselves quickly about licensing really was a crash course. We were very lucky to have some wonderfully patient and inventive licensors, including Janice Lam from Chorion US and Kathleen Brady from The Current Company, to name a few. We also used Google a lot—but while there were definitions floating around for much of the trade lingo (MGs, escalators, recoupables, advances) it also became clear that in the app world, everything old was new again. No one was sure what a reasonable royalty rate was, let alone an advance, term, or approvals process. So while I sketch out what some of the lingo means for us, remember, although things have settled down a little, there’s still a lot of room for negotiation, and confusion. So negotiate! Don’t be afraid to ask for what you want (if it’s at all reasonable). And if you get confused, ask for help. (Also, I’m neither an attorney nor an MBA, so these really are just rough approximations.)

Licensing as seen by Night & Day Studios

Licensor: This is the entity that owns the license. They “license out” a brand to you: the licensee.

Licensee: That’s probably you (the app developer) in this scenario, unless you’ve created a brand of your own and you’re ready to branch out into multiple new industries, in which case, good luck!

Royalty: This is a percentage of revenue that you pay the licensor. In our world, this is typically defined as a percentage of Net Sales. The amount of the royalty is often a trade secret, and we have seen it range wildly over the last few quarters before it began to stabilize. It is a key number to negotiate, and it varies depending on the strength of the brand, the marketing effort the licensor is willing to undertake, and the quality and readiness of the assets the licensor can deliver.

Net Sales: We have defined this as the amount of money you actually receive from Apple for the sale of your apps and in-app purchases. In other words, 70% of the Gross Sales, the amount Apple actually charged your customers. Remember to define Net Sales to also include any deductions for your in-app purchase provider: e.g. Urban Airship charges a small amount per download, and this amount should be deducted from your revenue before you calculate Net Sales and, in turn, royalties.

Advance: This is an amount of money a licensor may want up-front to seal a deal. Always make sure your advance is both recoupable and counts against the MG (see below). If possible, avoid an advance altogether, because you’re going to want as much as cash on hand as possible to pay your production team to make a great app for this licensing deal. Advances may range from a few hundreds of dollars into tens of thousands of dollars depending on the brand. Scary!

MG: Minimum Guarantee. One of the most daunting prospects in the licensing world, and really a leftover from movie and merchandising deals; probably should have no place in the app world, but it often comes up with larger licensors. In effect, you guarantee the licensor that you will earn a certain amount of money, and if you don’t, you’ll make up the difference with cash. Make sure the MG is recoupable too! (defined below). The app world is too risky to take on any sizable MG unless the brand is truly enormous. Always define the advance as part of the recoupable MG—for example, if you pay $1,000 down as an advance, count that as the first $1,000 of an MG, whether it’s $1,000 altogether or there’s three more MG payments of $1,000 a piece throughout the term.

By the way, the argument for an MG is that the licensor needs to protect themselves against a licensee who loses interest or who fails to publish or adequately promote an app. You’re basically telling the licensor, it’s okay to bet on us instead of one of these other developers, and I’ll back that bet with a minimum guarantee.

Recoupable: This is a very important concept, as you may have noticed. It simply means that the Advance and/or Minimum Guarantee can be “paid back” or recouped by royalties. For example, let’s say you have to meet an MG of $5k. That means that no matter what, the amount you pay to the licensor has to be $5k or more. If the MG is recoupable, then the royalties paid to the licensor ALSO count towards that MG. And if you paid an advance as part of the MG, that also counts toward the MG, and is included in the pot with the royalty payments too. This is complex and can get confusing, but the main thing is, you want all the payments you make to the licensor to be considered when meeting your MG requirements and your quarterly royalty payments. If they’re counted separately—if the advance or MG is NOT recoupable—then you’re going to pay a lot more.

Escalator: This is trade lingo for a royalty rate that rises, or escalates, over time. It’s based on a traditional publishing model; the theory is if a brand keeps selling and selling, at some point it’s the strength of the brand and not the efforts of the publisher that’s responsible for those sales. Let’s say you made a bunch of CDs with your local favorite band, and they sold better and better month after month. After a while, it’s really the touring, creativity, and energy of the band that’s selling those CDs; the CDs themselves haven’t changed. So shouldn’t the band get a larger share of the Net Sales? That’s the argument. But when it comes to making an app into a big success, we all know that’s a lot more than just doing it once and letting it sell. You have to maintain, improve, and promote the hell out of that app to keep it going. It’s a mutual result of you, the publisher, and hopefully the strength of the brand. In my personal opinion, it often makes more sense for the rate to stay fixed the whole time. It all depends on the nature of the deal!

Conclusions

This is all probably enough to make your head spin, or perhaps just enough information to get you into trouble. The main point is, think through how much you really think the brand will benefit you, because a license is an expensive animal to feed and maintain. Pay attention to how the approvals process that your licensor requires may slow your normal production timeline by weeks or even months. Make sure that when you talk about the required initial launch date—the date by which you must launch the app or the deal is off—and the dates when you will make MG payments, that you can actually hit these dates, and that you’ll have enough time to earn some money in the App Store—and get paid by Apple—before the first MG payment is due.

Most of all, get to know your licensors. Go out and meet them in person for a creative kickoff meeting, or as soon thereafter as you can manage. Develop a collaborative relationship with their creative director. And remember, they’re not your clients or your bosses: they’re your partners in this endeavor. You’re both trying to make money and keep the brand strong. So talk to them, make plans with them, and remember that they can benefit from your expertise as a developer just as much as you can from theirs as a licensor and brand manager. Oh, and try to have fun!