If you create something like a song, and a music company sells it online, to radio stations, and in physical stores, you will earn royalties. That is, the publisher will pay you for using and selling your creation.
Royalties may be paid for intellectual property such as patents, trademarks, or copyrights, or natural resources like gas, oil, or minerals.
The term ‘royalty’ may also refer to the people who belong to the family of a king and queen. In this article, the focus is on royalties as payments.
Creators, Owners, and Royalties
In essence, royalties are a way for you – if you are a creator or owner – to earn income from your asset without directly managing or selling it.
Authors of songs or books are creators, and people who own land that an oil or mining company wants to exploit are owners. Royalties are paid to creators or owners.
The Cambridge Dictionary has the following definition of the term “royalty”:
“A payment made to writers, people who have invented things, owners of property, etc. every time their books, devices, land, etc. are bought or used by others”
Royalties in Intellectual Property
Let’s take a look at three examples of intellectual property: copyrights, patents, and trademarks:
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Copyrights
These protect original works of authorship, including books, music, films, and software. When you buy a book, you are not buying the copyright; you are buying the right to use that specific copy.
If somebody wants to adapt that book into a movie, they must obtain permission from the copyright holder, who is typically the author, the inheritor (if they have died), or another person or company that bought the copyright from the author.
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Patents
Patents protect inventions, granting the inventor exclusive rights to use, sell, or manufacture their invention for a specific period.
If you invented a new way to manufacture cars and a carmaker wants to use your method, they must obtain a license from you, the patent holder, and typically pay you royalties.
The carmaker will only have to pay you royalties if you patent your method. That is why it is important to patent a new invention as soon as possible.
We can patent the following inventions: machines, processes, compositions of matter (such as new medications/drugs), articles of manufacture, and software innovations.
Patents do not last forever. Utility patents, including those for new medications or active ingredients, typically last 20 years from the filing date. Design patents last 15 years, and plant patents last 20 years. If you take out a patent, make sure you pay the annual maintenance fees.
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Trademarks
Trademarks protect logos, brand names, slogans, product packaging designs, and unique trade-dress elements.
Some trademarks are extremely valuable. As of 2024, Apple Inc. holds the title of the world’s most valuable brand, with an estimated brand value of $516.6 billion. Its trademark consists of its iconic apple-shaped logo with a bite taken out.
The Walt Disney Company licenses its trademarks, such as the iconic Mickey Mouse logo, movie characters, and other intellectual properties, to manufacturers, retailers, and entertainment companies. These licensees pay Disney a royalty fee to use its trademarks on products like toys, clothing, and merchandise.
Royalties in Natural Resources
If a company wants to extract oil, gas, or precious metal (build a mine) from your land, you can set up a royalty arrangement with them.
This means that the company will pay you a percentage of the revenue or profit generated from the extraction of those resources, usually based on the quantity extracted or the market value. In some cases, the interested parties may structure the royalty as a flat fee.
The royalties give the company the right to extract these resources from your land and sell them for profit.
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Landowners in East Texas
During the 1930s, during the Great Depression, landowners in East Texas who were involved with the Daisy Bradford No. 3 oil well near Kilgore became extremely rich when oil was found on their land. They became millionaires almost overnight.
How Royalties Are Calculated
In most cases, royalties are typically calculated as a percentage of revenue generated from the use of the property. This percentage can vary widely depending on the type of property, the industry, and the specific agreement between the parties involved.
A software company, for example, might charge a royalty of $1 for each copy of their software program sold by a licensee. The payer of the royalties is the licensee, while the receiver is the licensor.
When the licensor and licensee reach a deal, their legally binding contract includes specific terms of the royalty agreement, such as the royalty rate and payment schedule.
Piracy or Infringement
We call somebody who sells movies or songs without paying royalties and bypasses the necessary legal agreements a pirate or infringer. We refer to this illegal action as piracy or copyright infringement.
Similarly, extracting natural resources without compensating the landowner constitutes royalty evasion, which is also illegal.
Legal Experts
We refer to a lawyer who specializes in royalties as an intellectual property (IP) lawyer or an entertainment lawyer, depending on the specific context.
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Intellectual Property Lawyer
They handle legal matters related to copyrights, patents, trademarks, and licensing agreements, including royalty structures.
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Entertainment Lawyer
They typically work with artists, musicians, writers, and filmmakers to negotiate royalty agreements and protect their rights.
Etymology of Royalty
Etymology is the study of the origin of words and phrases and how their meanings and usage have evolved over time.
The term ‘royalty’ first emerged in the English language with the meaning explained in this article almost 200 years ago. In 1839, the term acquired the meaning “payment to a landowner for use of a mine.” In 1857, it also included “payment to an author, composer, etc. for sale or use of his or her work.”
Conclusion
Royalties are an important mechanism for compensating creators and owners for the use of their creation, property, or asset.
They play a vital role in encouraging innovation and creativity, as they provide a way for individuals and businesses to profit from their ideas and assets.
If royalties and the protection of intellectual property did not exist, creators and innovators would lack incentives to produce new ideas, leading to a world with significantly less innovation, creativity, and technological advancement.