Business surgery: Phona

Company name: Phona Ltd

Sector: education/ technology

Number of staff: One, with two other developer-collaborators

Company owner: Jenny Dance

Key clients: Oxford University Press, individual learners of English around the world (via iTunes)

Company overview

Phona Ltd (phona.co.uk) is a Bristol-based Education Technology company, which makes audio-visual apps to help people improve pronunciation and speech sounds.

Phona was formed after Jenny Dance, who also runs an English language training business, realised there was a gap in the market for digital pronunciation training tools for learners of English. She had a prototype built, and then developed a partnership product, the Say It app, in collaboration with Oxford University Press.

Since launch, the Say It app has sold in over 90 countries around the globe, and has won the prestigious English Speaking Union’s 2016 ‘President’s Award for New Technology in English Language Teaching’.

Phona plans to redevelop its technology for the healthcare market (speech therapy) and the broader education sector (primary schools, reading acquisition), as well as developing specialist commercial products, for example to support call centres.

The Challenge

One option for boosting our revenue is to licence elements of our technology for other companies to use in their products. What factors should we consider when putting together licencing agreements in the UK and abroad? What are the benefits to licencing the technology to other organisations, versus selling direct ourselves. Is there a ‘rule of thumb’ for the cost/ROI involved in a licencing agreement versus developing and selling products directly as Phona?

FEEDBACK

Carl Spencer, commercial & IP solicitor, Roxburgh Milkins

“Whether it is better to market and sell a product yourself or license third parties to do so will often depend on the expertise and focus of your business. Some IT businesses will stick with what they do best – developing – and license others to go on and distribute the product. Others will wish to keep full control over their product and manage the entire business model. Equally, businesses may have expertise and connections in one sector – e.g. education – or territory, but not others, so it may be better for the product to be licensed to another party with the right market expertise.

The benefit of licensing is that it can reduce the strain on your resources, as sales and/or support are effectively outsourced to third parties and their teams, and can also expand your product’s reach more quickly. A downside is that it will, to some degree, mean a loss of control over the product and how it is used and distributed, although this can be managed by finding the right licensing model and having legal agreements in place. It is difficult to give a rule of thumb for cost or return on investment in licensing but you may well lose some of the margin on the product as you share the spoils with others along the distribution chain.”

Emma Gallacher, associate solicitor, Mewburn Ellis LLP

Licensing requires significant consideration, however the following factors are useful starting points for Phona and other licensors.

(a) What is being licensed? The main proprietary asset in the “Say It” app is likely to be the copyright in the source code in the software and in the library of audio recordings of English word and phrase pronunciations. There is no ‘property’ in the concept of the app. Copyright only protects the expression of an idea in a work, rather than the idea or concept itself. By granting a licence of the copyright in the source code the licensee will be permitted to run the app for the purposes in the licence without infringing the licensor’s rights.

(b) Is the license going to be exclusive? An exclusive licence permits only the licensee to use the licensed assets. This means for the term of the licence, the licensor cannot grant licenses to other third parties or use the licensed assets themselves. Getting exclusive rights to the asset gives the licensee an advantage and this is usually reflected in the level of royalties charged. On the other hand, giving away exclusive rights is a risk for the licensor and so exclusive licenses usually impose obligations on the licensee to meet minimum exploitation requirements and to make a defined commitment of resources to the exploitation of the assets.

Alternatively, if the licensor wants to use the licensed assets to build and release products itself, then it must either grant sole (which permits the licensee and the licensor) or non-exclusive (which permits multiple licensees) licenses.

(c) How do you set royalties? There are a number of different approaches when it comes to determining royalties and license fees, including:

(i) cost approach: royalty is set at a level that will reimburse the licensor for its development costs over the term of the licence

(ii) income share approach: “the 25 per cent rule” sets the royalty as a share (i.e. 25 per cent) of the profit generated by the licensee; and

(iii) comparable market: this approach sets the royalty in accordance with comparable deals for similar technology within the marketplace, which option is most suitable will depend on the specific set of circumstances in each licensing situation.

Prospective licensors may need to decide whether it makes more commercial sense to continue developing and marketing products in-house or instead to licence out to third parties. To do this, they should carry out a risk and financial viability assessment and weigh up the savings on development costs from licensing, against the loss of control over the development process if they keep it in-house.