Typical Royalty Rates
'Typical royalties' are historically applied royalty rates. To understand the concept of 'typical royalties' one must infer that the term 'royalty' originally applied to the 'share of the proceeds' that the Crown demanded of its subjects for any exploitation of the assets owned by the Crown, for instance, mines, shipping lanes, geographic territories and the like. Besides the implication of sharing the proceeds of an operation, the payment of royalty was expressly an acknowledgement that the exploited property remained in the hands of the Crown; in other words, any exploitation was by a way of lease or franchise and not through sharing or transfer of ownership. Today this concept carries over to the absolute ownership of property in Intellectual Property rights (IPR), whether that resides in a product, process or system by a governmental, corporation or like entity.
Where there is lack of knowledge of the analytical concepts in royalty, the general tendency is to use mineral mining royalties as a base reference. Historically, royalties in the region of 1.0 to 3.0% have prevailed, the unit-base being 'sales value' of the exploited product. Little consideration is given to the character of the product or process being licensed, the nature and profitability of the market-place or the 'remaining life' of the licensed entity. In a slightly modified form, typical rates applied in the industry to which the product belongs is used; for instance, in the textiles, chemicals or auto-component industries.
As will be seen shortly, such arbitrary negotiation of royalty rates holds danger for both the proprietor/licensor of technology and its user/licensee. In a poorly profitable market, the licensee stands to lose disproptionately, and in a very profitable market, the licensor.
Read more about this topic: Royalty Rate Assessment
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