How to Earn Passive Income From Intellectual Property

May 31st, 2012 by Steve Pavlina

In the next several posts in our passive income series, we’ll explore a number of strategies for earning passive income. Let’s begin with one of my personal favorites…

Intellectual Property

Intellectual property refers to mental creations that are associated with legally recognized rights, such as material that can be copyrighted, trademarked, or patented. This includes articles, books, music, movies, artwork, photographs, comics, software, logos, and more.

Mere ideas do not generally qualify as intellectual property. It’s the expression of the idea that’s legally protected. You cannot claim the idea of poetry as your intellectual property, but you can copyright an original poem you’ve written, which gives you certain exclusive rights to that poem.

Since intellectual property is generally easy and inexpensive to duplicate, especially when it’s in digital form, it’s a great candidate for creating streams of passive income. You can deliver value to people simply by copying and sharing some data, and this process can be automated or outsourced.

To create a piece of intellectual property may involve a good deal of work, but that work need only be done once. After that, the property can be duplicated and shared with many people. You could potentially still be generating earnings 50 years from now for a piece of intellectual property you create today.

For instance, you can write a book once and then generate income from direct sales of the book or royalties from a book publisher. You can also earn income by selling the associated movie and merchandising rights.

Self-Publishing

Once you create a piece of intellectual property, one option is to sell it yourself and see if people will buy it from you.

This works well if you have a following or can build one. For people who are just starting out, it’s going to take a while to build that following, usually years. If you’re patient and persistent, this approach can really pay off though.

I used this approach with my games business. It took time to build a following, but I eventually got there. The only real way to fail is to give up, which is of course what most people do.

One of the leverage points for self-publishing is lead generation. This means finding a way to attract people who might be interested in your product. One way to do this is with advertising, but that can be risky and costly, so I don’t recommend it for most people.

My favorite method of lead generation is to give away a lot of quality free content. With my games business, I offered free game demos and submitted them to hundreds of game and software downloads.

Note that putting up free content on a website with no traffic is not lead generation. Nobody will see it. You have to get your free stuff into people’s hands, meaning that you have to put it where there’s traffic. If you don’t have the traffic, then put your free content somewhere other than your own website. The free content can then refer people back to your website, where they can buy something from you directly.

When you generate leads, don’t let them fizzle out. Try to collect them. People often need to be exposed to an offer multiple times before they’re willing to buy anything, so if someone visits your website but doesn’t buy right away, give them other options to stay in your communication loop, such as by subscribing to your blog or newsletter or by following you on Twitter, Facebook, or Google+.

As you generate leads over time, some of them will subscribe to one of your lists, so you can still communicate with them.

For my newsletter I use the service Aweber. I like this service and find it reliable, and the interface isn’t overly complicated. In a typical issue I provide a new article (that doesn’t appear on my blog — this is to reward subscribers), and there’s usually at least one promotional offer in my newsletter that can help generate income. Worst case I may just include a link soliciting donations.

Some people really push hard on the newsletters, sending them almost daily. I typically send mine about once a month, but I’m not perfectly regular about it. I’ve sent out 4 issues so far this year. If you wish to subscribe to see what it looks like — or to see what you’re missing — you can sign up here. Of course I don’t spam people or sell their email addresses, so all you get is the newsletter, and you can easily unsubscribe by clicking a link at the bottom of any issue.

To process sales you may need a merchant account and a shopping cart. It’s been years since I shopped for a merchant account, so I don’t know what kind of deals are available today. Try Googling “merchant account” to see if you can find a decent recommendation or review site for merchant accounts. You can also process orders via PayPal if you wish; they can handle credit card orders from non-PayPal customers, and their rates are competitive.

For my online shopping cart, I use the service 1ShoppingCart. That what I use to sell tickets to my workshops. You can also use them for doing newsletters if you wish. 1SC has tons of features, most of which I’ve never used, but those features can be helpful if you really want to go the direct sales route and optimize the heck out of it. I don’t use those advanced features because at present I earn more income from other sources than I do from direct sales.

Self-publishing is a long road. It’s definitely not a good choice for ADHD types. This is for the builders who enjoy creating something to endure.

The main advantage to self-publishing is that once you have it figured out, you’re pretty much golden. As you learn what works for you and what doesn’t, you can line up a string of repeat successes.

Licensing

Even though we speak of selling intellectual property products like ebooks and videos, what we’re really doing is licensing them. The information within isn’t actually being sold since no transfer of rights occurs. What’s being sold is a license to use that information, and often the license is limited to a specific purpose. You might also sell the physical media that stores the information, like a CD or DVD.

Licensing is more obvious with software which often includes a license agreement. You may have to agree to its terms in order to use the software.

In a broader sense, you can license your intellectual property to other entities, who can then exploit it to generate revenue, and depending on how you structure the deal, you can earn a cut of that revenue stream. This is what happens when you sign a publishing deal with a book publisher. They sell the book, and you receive royalties from the sales.

Some companies make millions from licensing their intellectual property for various uses. Look at the thousands of products with Disney characters on them, for instance. Disney earns a bundle in licensing fees for those products. Could you create the next Mickey Mouse?

Here are some more examples of what you can do with intellectual property:

  • Design a t-shirt, and license your design to a t-shirt company in exchange for a small cut of the sales
  • Take some scenic photographs, and license them to a postcard publisher
  • Record some relaxing music, and license it to people who sell meditation audio programs
  • Write a new iPad or iPhone app, and sell it through iTunes
  • Write an ebook, and sell it through Amazon.com
  • Invent a cartoon character, and license it to a toy company to create stuffed animals

My ex-mother-in-law is an artist, and many years ago she licensed the artwork from some of her paintings to a greeting card company. She earned royalties from the sales of those greeting cards.

Don’t let the word licensing scare you. Licensing simply means “giving permission.” Normally when you license work you created, you and the other party will sign a contract to spell out the terms. You can have a lawyer draft one for you, find boilerplate agreements online, or create your own.

Licensing Agreements

I paid lawyers to draft my first few licensing agreements, and once I became familiar with the key terms, I could easily write my own agreements, using what the lawyers created as a reference. Depending on the complexity of the agreement, it would cost me anywhere from several hundred dollars to a few thousand dollars to have a lawyer draft it for me. I would only do this if the deal was likely to generate more than enough income to cover the legal fees.

If I have a complicated licensing deal to negotiate, or if there are contract terms I’m not familiar with, then I’ll consult with a lawyer to handle the tricky bits. I used a lawyer to help out with my book deal in 2007, which cost me $2000. She helped me negotiate for better terms in some parts of the agreement, which I feel more than made up for the cost of her services.

Legal bills can add up quickly, but for deals where a lot of money is involved, the professional help can be well worth the expense.

Often you don’t have to draft a licensing agreement yourself since they other party may provide one. Publishers do this as a matter of course. Then you only have to review it and suggest changes. I’ve rarely signed a licensing agreement without asking for something to be changed.

If you’re broke or want to learn how to draft licensing agreements on your own, a good source for info is Nolo Press. They sell many quality books, software, and do-it-yourself legal kits.

Re-Licensing

If you create some intellectual property that can be licensed, you can even grant someone else the right to license your creation for you, usually by giving them a share of the revenue streams. For instance, my book Personal Development for Smart People was recently published in Polish. I didn’t handle that deal; my publisher Hay House did. I didn’t even know about it until I received two copies of the Polish edition in the mail. Hay House isn’t publishing the book in Polish though. Hay House relicensed my book to a Polish publisher, which paid Hay House for those rights, and then Hay House and I split that money in accordance with our agreement. I gave Hay House the right to relicense my book to other publishers around the globe.

What do you do if you’re a creative type who can create interesting intellectual property, but you aren’t any good at selling or licensing it? Team up with someone who can handle the selling and licensing for you.

If I had retained the global licensing rights for my book, I could have done those foreign deals myself and kept all the money. But would I have done that as well as Hay House has been doing? Maybe… maybe not. They have connections and foreign rights managers and knowledge of different markets to put those deals together. That’s why my book is in so many different languages now. If I tried to do it myself, I might have gotten some results, but it would have been much more time consuming and expensive to do it on my own, and I’m not giving up so much money to have Hay House handle this anyway.

Agents

When I ran my computer games business during the 90s, I knew how to create a game, but I didn’t know how to get them published. My first method was to go to Comp USA, look at a bunch of game boxes, and get the addresses of as many publishers as I could. Then I snail-mailed a letter of introduction to dozens of them. Maybe 3 or 4 wrote or called back. None of those inquires resulted in deals, however. This was a rather naive shotgun approach but not very well targeted. I even got at least one in-person meeting this way, but it was clear the publisher wasn’t a good match for the kinds of games I wanted to write.

Eventually I got introduced to a game agency by some other contact. Game agents act as brokers between game developers and game publishers, helping to create deals. I met with them and liked the idea of working with them. They helped me figure out what kinds of games to develop based on market trends, they set up meetings with publishers and helped me try to secure and negotiate deals. If they could get me a deal, they would get a percentage of whatever revenue I received, so it was no money out of pocket for me.

Usually I met publishers at conferences like E3 or the Game Developers Conference, but sometimes I flew to their offices. My agent set up these meetings. Fortunately E3 was in L.A. where I lived, except for a few stupid years when they moved it to Atlanta, so that was convenient. I remember some sleepless nights preparing last minute demo updates for these conferences.

For me this approach was hit and miss. I landed some deals this way, but they weren’t good deals. Some money came in ($120K in advances), but no games ever got published and released. I can’t fully blame the agent for this. Suffice it to say there are a some truly bad apples in game publishing. The recent conflict between Activision and the Call of Duty developers reminds me of the kind of crap I had to deal with back then.

Be Cautious

That said, I later did some nicely lucrative game licensing deals, but I learned to be very selective about which publishers I worked with. When it comes to licensing, it can be more important to avoid bad deals than it is to land good ones. If you’re going to get into this form of income generation, it can really pay off, but you may be risking a bloody nose now and then.

My best advice for evaluating a potential licensing partner is to do your homework. Get in touch with people who’ve worked with that potential partner, and ask if they’re willing to share their experiences. Listen to what they say, and take it to heart.

I once did this when a game publisher approached me for a licensing deal. Their website had a list of developers they’d worked with in the past. I emailed all those developers (about 6 of them), and they all wrote back. Without exception what they told me was very specific and very negative. None of those developers had seen a dime in royalties. This publisher was ripping them off, selling their games in other countries and paying them nothing. Needless to say, I never worked with them, and I shared what I learned with other developers I knew to make sure they avoided this trap.

Dealmaking

Once you get good at licensing, you can generate new revenue streams by acting as a dealmaker. This may seem daunting if you’ve never done it before, but with practice it can be a lot of fun. You can get paid to act as a matchmaker.

Many years ago I licensed a computer game from a small game developer, including the right to re-license it. I published and sold the game through my own company, but I also turned around and re-licensed it to another publisher. This generated an extra stream of royalties, which I split with the developer as we had previously agreed. Could the developer have done this deal on his own? Maybe… but it would have taken him a lot longer. It was easy for me to close this deal quickly because I already had the connection with the right publisher.

Notice in this case that I didn’t create or own the game, and I didn’t own the other publisher’s business or sales outlets. I just put the deal together, which generated income for the publisher and the developer — and for me as well. So please note that you can create streams of passive income from intellectual property even if you don’t own the property or the sales platform. You can get a cut of the action for being the dealmaker, and deservedly so.

For several years I’ve worked with a guy who helps me find good joint venture deals. He’s well connected in the personal development field and seems to spend most of his working time on the phone. He knows people who have great products and services. And he knows people who have sizable audiences like me. He connects one with the other, helps massage the deals into place, and enjoys a share of the revenue created by these deals. These income streams have paid off his mortgage. He didn’t receive any special training for this, but through life experience he discovered that he was good at introducing people to each other, and he found a great way to turn that into multiple streams of income. On top of that, he recorded and produced his own music album, and he’ll begin selling that soon as well. The deals I’ve done with him thus far have generated revenue for me well into the six figure range. Note that he gets paid not for the introductions (i.e. not a finder’s fee); he gets paid a small percentage of revenue from each deal he helps to close.

If someone brought you an easy-to-close deal that earned you an extra $1000 per month, would you be willing to pay them $100 per month from that revenue stream for doing the legwork?

Some people are so good at dealmaking that they can generate millions in passive income with just a few phone calls. There’s real value in connecting two or more people or businesses that can synergize their resources, if only they knew of each others’ existence.

Creativity

Intellectual property is a nice choice for creative people because it’s so flexible. You can create a piece of property once and then license/sell it in many different forms.

I also love that you don’t need a lot of money to create intellectual property. I wrote my best selling computer game when I was dead broke. Its budget was basically $0. It didn’t cost me anything to write my book either. You can create a great deal of content for free.

However, because the barrier to entry is so low, it means that lots of people are going to attempt this. The vast majority won’t be any good, but this does create a crowding effect. Even if you’re good at what you do, it may take some time to separate yourself from the mosh pit of wannabes, especially in the eyes of people you’d like to work with.

When you create something, try not to wrap your self-esteem around it. In the beginning you’re probably going to suck. That’s okay. Everyone but Mozart sucks initially. Keep practicing and honing your skills, and you’ll get better.

I love doing creative work, so I’ve created a great deal of intellectual property, including software, several computer games, game characters, a book, articles, podcasts, newsletters, logos, speeches, workshops, poetry, signs, music, artwork, and more.

Being creative isn’t enough if you want to turn your creations into income streams. Selling, licensing, and dealmaking are important skills as well, and I suggest that you try to respect these roles as much as you respect the content creation side. If you’re unwilling to develop those related skill sets, then give some serious thought to partnering up with someone who can perform those roles. If you can convince them of your creative genius, it’s a great opportunity for them as well. It certainly worked out well for Steve Jobs acting as dealmaker for Steve Wozniak in the early days of Apple Computer.


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