Understanding Royalty
A royalty is a contractual payment made to the individual or company of a particular asset or intellectual property, such as patents, copyrights, trademarks, franchises and natural resources. This payment is made by a person to use, produce or sell the tangible or intangible assets belonging to another person. Royalty is usually made as a percentage of the revenue generated from the asset or as a fixed fee.
Types of Royalties
- Book Royalties
- Authors get paid by publishers for each book that is sold to consumer. The amount is usually agreed upon in advance.
- Performance Royalties
- Copyrighted musicians earn money whenever their music is played publicly, or is used in movies or elsewhere by a third party.
- Patent Royalties
- Inventors or creators who hold patents get paid by others who use their products. These payments are part of a licensing agreement to pay royalties to patent owner.
- Franchise Royalties
- Franchisees pay fees to the franchisor to open and run a branch using the franchise’s brand and system.
- Mineral Royalties
- Paid to governments or property owners by mineral extractors for extracting minerals, metals, or other resources from their land.
How does Royalties Work?
A royalty agreement involves two parties: the licensor, who grants the right to use an asset or resource, and the licensee, who pays for this right. These agreements are typically for commercial use and can involve detailed negotiations.
The licensee usually pays royalties as a percentage of sales or revenue. Common examples include music and publishing rights, where creators receive a share of the earnings from their work. Royalties provide a passive income source to those who own intellectual property or artistic works.
In non-renewable energy sectors, such as mining or oil and gas extraction, royalties are paid to the government. Similarly, television channels pay royalties to satellite companies for broadcasting rights.
