CASE STUDY:

Partnership A third distribution option was a deeply integrative partnership with one or more

major eyewear manufacturers. A deal with a company like Luxottica, Safilo, or Marchon might be

modeled on agreements that those manufacturers signed when they licensed the exclusive right to

create eyewear using a fashion houses brand name, often for a period of 3 to 10 years with renewal

options. The manufacturer typically paid its licensee a royalty equal to 5% to 14% of net sales,

depending on the brands strength and whether sales were made through wholesale or

manufacturer-owned retail channels. Manufacturers could afford to pay a higher royalty when they

earned a retail margin. In addition, a manufacturer typically committed to mandatory marketing

spending in the range of 5% to 10% of net sales. In some cases, the licensee was paid an up-front

advance against future royaltiesfor example, a $20 million advance upon signing a 10-year

agreement.

If the Glass team entered a partnership with a manufacturer, they would have to reach agreement

on a number of points, including:

What would be the collaboration model for the partnership? Typically, when large

manufacturers licensed a brand, their in-house teams took lead responsibility for creating

frames and consulted with the licensees designers to ensure that the frames fit with the

brands image and style.

Google planned to manufacture the electronics modules for Glass-branded eyewear. Google

would almost certainly sell those modules to its partner, who would then resell the module

along with frames through wholesale and/or retail channels. Under this arrangement, would

the partner require a guaranteed price or a profit margin cap for the module?

What royalty structure should Google try to negotiate? Should Google be compensated in the

same way as an established fashion brand for allowing a manufacturer to sell eyewear bearing

the Google Glass name------i.e., with a royalty on net sales? How should royalties vary by retail

channel------i.e., for sales made (1) directly by Google, (2) through third-party retail stores, or (3)

through the partners retail outlets?

With respect to marketing support from a partner, did traditional eyewear licensing terms------

i.e., mandatory licensor spending equal to 5% to 10% of net sales------make sense for Glass?

Would a partner expect a reciprocal marketing commitment from Google? Should Google

seek an agreement from its partner to train optical store personnel to sell and fit Glass? Could

eyewear wholesale reps actually handle this demanding task, or should Google take lead

responsibility for such training?

If a partner required exclusivity, how should Google respond? For example, should any

exclusivity be reciprocal, with both parties agreeing not to seek other partnerships in the

smart eyewear space?

What would be the geographic scope of an agreement? If a partner had weak distribution

capabilities in certain regions, Google might prefer to avoid a global agreement.

What would be the optimal length for an agreement? It was difficult to predict how Glass

would evolve, so perhaps it made sense to limit an exclusive distribution deal to the expected

life span of the next major version of the product, which was difficult to predict but might be

in the range of 18 to 24 months. Standard eyewear brand licenses had term lengths of 5 years

to upwards of 10 years. Would that provide enough incentive for a partner to invest in

marketplace development?

Of course, these deal points would be relevant only if the Glass team decided that a partnership

made more sense than direct distribution or an open platform. The eyewear industry seemed hungry

for a major innovation that could drive growth in demand, and a partnership with Google to jointly

develop Glass products might give an eyewear manufacturer or retailer an edge. Likewise, tapping a

leading manufacturers design capability could accelerate efforts to position Glass for mainstream

consumers. Olsson commented, I get really excited when I think about the deep insights these

companies have about consumer preferences and fashion trends. Wed have to boost the size of our

design team tenfold to begin to match that insight. A partner could bring a wide variety of styles to

market at great speed. But would industry incumbents embrace an innovation as radical as Glass?

And if several players were open to partnering, how should Google decide which ones to work with?

Teaming with Luxottica had obvious appeal. Luxottica had very strong capabilities at every step

of the value chain: terrific design capabilities, low-cost manufacturing, powerful wholesale and retail

distribution, and its own eye-care insurance provider. But Safilo, Marchon, and other eyewear

manufacturers also had impressive brand portfolios and capabilities along with aspirations to keep

pace with Luxottica. Would a big, but not biggest manufacturer offer Google a better deal and

more support?

And what about Warby Parker? Its customer base skewed young and tech savvysimilar to the

profile for Glass early adopters. However, its brand positioning seemed different than Glasss: Warby

Parker positioned its products as low-cost fashion accessories, akin to Swatches. Also, Warby Parker

currently lacked distribution outside of North America.

Teller had asked Liang and Wong for a recommendation on which distribution strategy to pursue.

He had also asked for a plan for exploring partnership options, specifically (1) which potential

partners were most attractive, and (2) what deal terms Google should seek to negotiate. Finally, the

business development team would have to determine the sequence for approaching potential

partners. Did it make sense to restrict contact to a single preferred partnerat least until a deal

proved unlikelyor, from the outset, to open simultaneous discussions with several potential

partners?

Liang and Wong had filled a whiteboard with pros and cons for different approaches. Exhausted,

Liang tilted her head and said, Okay, Glass, show me the best way to bring you to market . . . .

QUESTION:

HOW SHOULD THE PARTNERSHIP BE STRUCTURED FROM GOOGLE'S PERSPECTIVE?

SUBJECT: MANAGING STRATEGIC PARTNERSHIPS