Royalty

A royalty is a kind of payment that a person or an organization receives from the other party that buys a right to constantly use an asset. It comprises copyrighted works as well franchises, natural resources, etc.

For example, a royalty may be called such payments as for original songs that will be played in different places and in movies as well. Thus, a musician gets royalties every moment his piece of art is used somewhere. There also may be a book royalty, in this case the author gets royalties for every sold copy. Nowadays, copies may be either in the form of paperback or electronic versions of it. In case there are people who are interested in the adaptation of the book, the author is entitled to royalties as well.

Generally, royalties are payments that are meant to become a kind of compensation for the creators of any kind of property as soon as the property is licensed out to the other party.

Special conditions and third party

Usually, royalties are a certain percent of the gross revenue or net revenue earned by means of using a property. Nevertheless, it’s possible to change in case an original owner has different desired conditions and a buyer accepts these new conditions. The buyer also has an opportunity to set their own conditions.

There are situations in which an original inventor or owner sells the made product to a third party. For example, a major corporation produced an innovative product, but since it focuses more on invention rather than on selling, the corporation sells the product to the third party. The third party, in its turn, distributes the product among users and pays to the corporation. Thus, the corporation receives its royalties.

Another situation, where third parties are involved is when a musician created a song under a company and someone wants to include this song in a movie or show. In this case the company is the third party who gives a permission to use the song, gets money for it and then makes payments, i.e. royalties, to the original owner.

However, the relationships that appeared thanks to royalty usually involve two parties. The one party is called a licensor, it’s an original owner of a property, this person is entitled to the royalty. The other party is known as a licensee, and it can be a company, corporation, individual, etc. This party is usually the one who pays the royalty. A royalty agreement provides access to the brand new market for the licensor and access to the product for the licensee, since there is no other way to get the product, but signing the royalty agreement.

Types of Royalties

Original owners have all rights to charge royalties to organizations that have intentions to use the products created by these owners. There are numerous types of properties that are eligible for royalties in case the property was sold.

Performance royalties. This kind of royalties usually refers to cases in which music is used. For example, there is an original owner, the owner created a piece of art, a song in this case. Then some company decided that this particular song would be a great accompaniment for a movie that the company is producing right now. Thus, the company contacts the original owner and asks permission to use the song. In case the owner agrees, he or she is entitled to royalties. The owner may get royalties right from the producing company or rely on the third party, which will collect royalties and pass them straight to him or her.

Franchise royalties. In case someone desires to make his or her business a part of a famous franchise, this someone must pay royalties to the franchise owner. The owner in such a relationship is called a franchisor, and the person who wants to become a part of the franchise is known as a franchisee. For instance, if you want to open a KFC restaurant, you need to pay the company an initial fee, which is $45,000 and then 5% of your gross revenue every month.

Mineral royalties. This type of royalties is also known as mineral rights. In case someone wants to extract minerals (or gas, oil, etc.) but the land with minerals has its owner, then the owner is entitled to royalties. The amount of each royalty is discussed with the owner, his or her wishes are taken into account. Usually, the amount is calculated from revenue or units.

Book royalties. Book royalties are the royalties, which an author will get from their publishers. The basic rule is the author gets money for every sold copy. Thus, the more books are sold, the more royalties the author gets.

Patent royalties. This kind of royalties may be also called a compensation for using an intellectual property. It mostly refers to the creators or innovators and their products. In case someone has an intention of using a product, they have no choice but to enter into a licensing agreement. Such an agreement sets the amount of royalties and provides access to using the innovation. In this case, the product is described as a patent.

Licensing Agreements

Licensing agreement is a special agreement, where all conditions that are desired by the property owner and the person who buys the property. For example, such things as limitations and restrictions of the royalty may be put in the agreement. Limitations and restrictions usually refer to the geographic limitations, time limitations (i.e. the precise duration of the agreement or it can be perpetual), etc. In case one party of such an agreement is the government, then it’s regulated uniquely. The same exclusive terms are applied, if the agreement is considered a private contract.

Royalty Rates

Royalty rates are the special indicator that is reflected in the licensing agreements. The indicator shows the percentage of made sales or a payment per unit. The indicator may be affected by other factors. For example, the royalty rates may be lower if the product isn’t the only one in the world, if there are alternatives that are easier to purchase, if the risks taken are too high, if the product isn’t popular or needed, etc.

Royalty rates must be calculated with high thoroughness. In order to assess it in that way, all transactions between the original owner and the buyers have no choice but to be carried out willingly. There is no place for coercion and similar things. Moreover, it’s better that both parties weren’t familiar with each other, in other words, it should be the first deal they conducted with each other.

Examples of Royalties

Any author is entitled to royalties, in case at least one of his published books is sold and payments are stated in the licensing agreement. For instance, the writer George R. R. Martin is famous for his series of epic fantasy “A song of ice and fire”. More than 90 million copies are sold all over the world, the author can get royalties for all of them. Moreover, in 2011 the book series has been adapted into a TV series by HBO. His HBO royalties for the book adaptation are estimated to be around $15 million per year and book royalties are around $10 million.