Co-marketing arrangements present a wealth of opportunities to expand your business. They allow business owners to expand distribution and revenue while leveraging another’s strengths, all while providing a better offering to users. But at a certain point, a longer term initiative presents itself - the joint venture. Joint ventures offer many advantages to traditional co-marketing arrangements, but also bring significant disadvantages and risks.
What is co-marketing?
Co-marketing takes many forms. When online, co-marketing can mean two parties marketing each other’s products and services, co-branding a single product or service under a combined brand or using each party’s trademarks, and bundling two pieces of software. It is usually documented in the form of an agreement between the two parties.
What is a joint venture?
A joint venture is a form of partnership (not necessarily in the legal sense) where two or more parties agree to undertake a business, or to operate a product or service, or in the co-marketing sense, to co-market their respective products and services. A joint venture can be documented by virtue of an agreement between parties, a more formal formation of a partnership or the formation of a limited liability company or other entity the parties determine to use to undertake the business, or to operate or co-market one or more products or services. For example, Hulu is a joint venture of NBC, Fox and Disney, and Vevo is a joint venture of Sony Music, Universal Music and Abu Dhabi Media (to create a Hulu for music videos!).
What are some of the key differences?
Time – While co-marketing arrangements can be long-term commitments, they are more often structured as shorter term agreements (1-3 years) – so that the parties can facilitate key initiatives but also have an exit strategy if things are not working out. Joint ventures, on the other hand, are by their very nature long-term arrangements. They are an extended partnership between or among parties.
Commitment – Co-marketing arrangements require both parties to commit to marketing and distribution initiatives (both of which require financial commitments). Joint ventures, however, often take a further step in that they require one or more of the joint venture partners to commit real capital to form and operate the business, obtain office space for operations, and hire employees (among other things).
Management – Co-marketing arrangements have both parties contributing time and resources, but it is typically through their respective company’s efforts. A joint venture often appoints management from one or all of the joint venturers, or independent management in many cases. Sometimes the parties appoint a board comprising of all joint venturers, while only one party manages the enterprise. In all events, through such a combined management structure, among other factors, the joint venture takes on a life of its own.
Building Value – Co-marketing arrangements go far in building individual value for both parties. With a joint venture, the parties can actually build value, equity value or otherwise, in a third party – the joint venture.
What are some of the advantages of forming a joint venture vs entering into a co-marketing agreement?
Additional Resources – In many cases, joint ventures require one or more parties to invest real capital to form the venture and keep it going, including funding its initial losses from operations. Sharing these obligations allows a smaller joint venturer to have some of its operational costs subsidized by its larger partner. This often happens in situations when a larger, well-capitalized partner desires to get in business with the smaller partner that has the “next best thing”. In a co-marketing situation, the larger partner may be undertaking activities that ultimately help the smaller partner thrive (such as distribution or marketing of its software or website), but they may not be contributing real capital.
Market Entry – In many territories outside the United States, it is extraordinarily difficult to enter a market without venturing with a local partner. In those cases, a co-marketing relationship may not work for legal reasons, or may not provide adequate incentive for the local partner to be involved. But once achieved, a territory-based joint venture can accomplish international market expansion that would have been otherwise unachievable or at a minimum, cost prohibitive. Territories in Asia (e.g., China) are typical for these forms of joint ventures.
Equity Value – As mentioned above, a successful joint venture can not only have value as a stand-alone enterprise, but can also increase the value of its individual partners. Additionally, when a joint venture is highly reliant on one of the partners and thereby mostly building value in that partner, there may be opportunities for the others to tie their equity in the joint venture to equity in the key venture partner (e.g. “put” rights for their JV equity in exchange for securities of the key partner) – thereby ensuring that a successful liquidity event for the key partner is also beneficial to the other joint venturers. A co-marketing arrangement will not have such an arrangement in most cases.
What are some of the disadvantages of forming a joint venture vs. entering into a co-marketing agreement?
Loss of Control – As described above, one of the key features of a JV is the role of management, and the necessary participation in management by all joint venturers. The result of joint management is in many cases a loss of control. Whereas parties can direct their own activities in co-branding arrangements, subject only to their contractual obligations, in a JV, each partner must take into consideration the views of the others, and in some cases, one partner is dependent on the other (for financial support or otherwise).
Unwinding the JV is Difficult – While co-branding arrangements are short term in many cases, joint ventures are often times permanent. The JV entails the conscious decision of joint venturers to enter a market or launch a product or service together – hand in hand. If it doesn’t work out, divorce is often messy. Joint ventures necessarily have to consider what happens to office space and users, as an example, and also to other assets and liabilities (including to other joint venturers). This unwind is complicated and often times expensive to the extent that a buy-out must be accomplished (of one JV partner by another).
No Exit Strategy (sometimes) – In some cases, JV partners find themselves stuck within the joint venture. In the absence of outright breach, they may not have contemplated an exit from the JV under all circumstances. Accordingly, even if successful, they can end up stuck. For example, in the absence of an ability to terminate on the change of control of another joint venturer, or to participate in that venturer’s transaction, the other partners may find themselves stuck in a JV with a partner they did not expect or desire (e.g., the acquirer of the other joint venturer).
Ultimately, while their formation is more complicated than the standard co-marketing arrangement, and requires significant analysis, joint ventures can bring extraordinary value to the individual joint venture partners – particularly in co-marketing-focused arrangements – and are worth exploring.
Greg Akselrud, Chair of the Internet, New Media & Entertainment Practice Group at Stubbs Alderton & Markiles, LLP can be reached at email@example.com or on Twitter as @gregakselrud.