What is a Royalty?
In order to make use of any property like patents, copyrighted work, franchises or natural resources in exchange for defined payment, that payment is known is Royalty. The royalty payment is directly made to the owner of the legal owner of the copyrighted work, franchises, or natural resources. Generally, the royalty payment is defined in such a way that the owner of the asset is compensated for using the assets with a legal agreement or binding.
Breaking Down ‘Royalty’
The Royalty payment is normally defined based on the percentage of the total revenue obtained by using the assets which can be negotiated and defined that offers equal benefits to both the parties. The royalty payments or royalties come into the picture when the legal owners of the asset want to sell his/her product to any third party in exchange of the royalty share or revenues that it can generate.
The famous Microsoft Company is a great example of the royalties that they offer for Windows operating systems for the computers manufactured by them. The royalties are just not limited to the software giants. It is a kind of payment that can be made for non-renewable resources, patents, trademarks, franchises, copyrights, publishing books, music or art. Even the famous fashion designers are eligible for the royalties for using the name or designs of the company. Individuals who have authored books or musicians who have composed or even production professionals are offered royalties for the using their produced/copyright materials. Royalties are also given to the television satellite companies which air the popular stations across the nation. Royalties have also touched the oil and gas sector where companies offer royalties to the landowners for giving them the rights to extract natural resources from the land.
The license agreement is the legal document in which the terms and conditions of the royalties are defined. The detailed information on the usage/limits/restrictions/conditions of the royalties is mentioned in the agreement. The terms may include the limit of geographical territory, time period of the agreement will be in effect, products or particulars of the royalty cuts. The license agreements are regulated especially if the owner of the resources is government or it is between private parties.
The royalty rate of the products or services is defined on based on the royalty-free that the party is offering. Several factors are taken into consideration while defining the royalty rate. Some of the major factors are rights, alternate options, level of risks, demand in the specific market, sustainable technologies, and the kind of innovation that the product or service offers.