What Are Royalties? (With Types and Examples)

Updated March 20, 2023

When franchising a business, publishing a book, or releasing music, you may pay or receive royalties. Royalties are payments to owners of certain property to use their assets. Learning more about what royalties are and how they work can help you determine whether you're required to pay or receive them. In this article, we answer the question, "What are royalties?", discuss how they work, talk about the different types, give you the answers to frequently asked questions you may have, and offer examples of royalties.

What are royalties?

Learning the answer to the question, "What are royalties?" can help you decide whether to pay them or create a royalty agreement. Royalties are payments to property owners to compensate them for using their assets. This property may be intellectual, like literary and musical work, or physical, like minerals. These payments may be a percentage of the net or gross revenues that the person using the property earns. For example, if a movie producer uses an artist's song in their soundtrack, they may owe 1% of the movie's earnings to the artist.

Related: A Guide to Revenue vs. Sales (With Differences and Types)

How do royalties work?

If an inventor or property owner wants to sell their assets to a third party, they may meet with them to create a royalty agreement. A royalty agreement is a legal contract between the property owner, or licensor, and the licensee, which is the person who wants to use the property. It gives the licensee permission to use the licensor's property under conditions outlined in the agreement. For example, a fashion designer may allow a licensee to use their brand name on one t-shirt only rather than an entire clothing line.

The royalty agreement also includes details like the amount the licensee pays, when they're expected to pay it, and how long they can use the licensor's property. Royalty agreements typically benefit both the licensee and the licensor. The licensor receives revenue, and the licensee uses the property to also earn money.

Related: What Is a Partnership Agreement? (Components and Importance)

Types of royalties

There are different types of property that owners can license to receive royalties, such as:

Music royalties

When someone wants to use an artist's song, they pay that artist royalties. Here are six types of music royalties that licensees might pay:

  • Streaming royalties: When an artist or their label uploads their music to a streaming platform, they can earn money when people play their music. Artists typically receive a portion of the streaming service's revenue according to how many times people played their songs.

  • Performance royalties: When a public broadcaster plays a copyrighted song, they pay the artist royalties. This includes radio stations, television channels, movies, restaurants, venues, or other third parties.

  • Print music royalties: When someone transcribes music to a print piece, like sheet music, they pay the artist royalties. Classical music artists or film score composers typically receive print music royalties.

  • Sync royalties: When copyrighted music plays with visual media, it can generate sync royalties. Music publishers may sell this sync licence to people who want to use the music in video games or commercials.

Book royalties

When authors write a book, they find a publisher that wants to create, market, and sell that book. To do this, the publishing company purchases the rights to publish the book from the author. They typically pay the author an advance and agree to future royalties based on book sales. Publishing companies typically agree to pay these royalties once or twice a year, so authors receive a lump sum.

Related: How Much Do Authors Make and What Do They Do? (With FAQs)

Patent royalties

When a person creates a product, they may choose to patent it. If anyone wants to use that product in their own designs, they pay the patent owner a fixed-rate or royalties. When both parties agree to royalty payments, the patent owner typically receives a percentage of the revenue the licensee earned from using the patented product.

Related: What Is Product Licensing? (Benefits and How It Works)

Franchise royalties

When a business owner creates a successful brand, they may decide to franchise their business. Other business owners, or franchisees, can then decide to pay a royalty to the franchisor to open a branch under their company's name. The franchisee may pay an upfront fee to the franchisor to access their business model and ideas. Then, the franchisee typically gives a percentage of their gross sales to the franchisor each month.

Related: What Is Brand Licensing? (With Benefits and Helpful Tips)

Oil, gas, and mineral royalties

Extractors pay property owners mineral royalties, or mineral rights, when mining on their land. Extractors may pay royalties based on their revenue or the number of units they extracted. For example, if a company extracts 10 barrels of oil, they may pay the property owner royalties based on just these 10 barrels.

Related: 14 Best Careers in Mining to Consider (With Job Search Tips)

Frequently asked questions about royalties

Here are some answers to frequently asked questions you may have about royalties:

How do musicians collect royalties?

As musicians typically receive royalties from multiple streams, it can be challenging for them to collect their own royalties. Instead, their record label may hire a distributor who collects the royalties from streaming platforms, media outlets, and other third parties. The record label may keep a portion of the royalties then distribute the rest to the musician.

How do property owners collect royalties?

Other property owners may receive regular direct deposits for their royalties. Some may receive cheques in the mail that they can deposit into their account themselves. The licensee and licensor typically agree to the payment method ahead of time and include it in their royalty agreement.

What are royalties in stocks?

It's possible for people to invest in stocks if they're interested. Investors can seek these opportunities through royalty auctions. They purchase a fraction of the royalty and receive that portion when the property owner does. For example, if an author sells a portion of their royalties to an investor and receives their royalties twice a year, the inventor receives their portion twice a year as well. This can be a less risky option compared to traditional stocks, as the investor's return isn't dependent on interest rates or the stock market.

Do musicians receive royalties for live performances?

When musicians play their own copyrighted music live, such as at a concert or bar, they still receive royalties. The venue pays the performance royalty to hire the musician to perform. Smaller venues may pay a smaller fee, so when musicians perform at larger venues, they have a better chance at earning more royalties for every song they play.

Do self-published authors receive royalties?

Authors may decide to publish their books themselves rather than choosing to work with a publishing company. While publishing and marketing the book may be harder for the author to do alone, they can earn higher royalty rates. The rates they earn depend on their expenses, as they may have costs like paying a printing company to print their book or paying a graphic designer to create the cover. The amount of revenue they have left after paying these expenses is their royalties.

Examples of royalties

Here are some examples of royalties to help you understand the concept better:

  • An author publishes a book and receives 10% of net sales on all hardcovers sold and 8% on all paperbacks. The publishing company sells $100,000 worth of hardcovers and $150,000 worth of paperbacks, so the author receives $22,000 in royalties.

  • A musician releases a song on a streaming platform that receives 1,000,000 streams. The musician receives $0.004 per stream, so they earn $4,000 in royalties.

  • A franchisee agrees to pay 5% of gross sales each month to the franchisor to open their own branch of a well-known fast-food restaurant. The restaurant earns $90,000 in gross sales in its first month, so the franchisee pays $4,500 to the franchisor in royalties.

  • A designer creates a unique type of screw and decides to patent it. A furniture manufacturer wants to use the screw in their designs, so they agree to pay the designer 1% of all furniture sales that include the screw.

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