“The fluctuation of average annual rates, as well as the generally downward trend of the rates in Chart 3, may have reflected the structural changes in the licensing market since the enactment of the America Invents Act (AIA) in 2011, which introduced inter partes review (IPR) proceedings in late 2012.”
On September 26, Licensing Executives Society (LES) USA and Canada published the LES High Tech Sector Royalty Rates & Deal Terms Survey Report 2021. In May of this year, the 2021 Global Life Sciences Royalty Rates and Deal Terms Survey results were released. Together, the releases culminated the intense efforts by LES during the COVID-19 pandemic in preparing and launching the Surveys and in analyzing the data, presenting the results and writing the Reports.
Not only do LES Royalty Survey Reports provide an update on the licensing market in the past few years, they look into the dynamics of market evolution since the 2000s. The Reports offer benchmark royalty data by various categories, such as technology field and IP type, which serve as invaluable references for licensing professionals. The 2021 High Tech Survey Report is also the only data source in the IP industry that quantifies and publishes royalty rate premiums or discounts such as exclusivity premium and advanced-stage technology premium. Through identifying and quantifying the value contributions of key license parameters such as exclusivity, technology development stage and IP type, among others, the LES team aims to develop a build-up method for royalty determination, analogous to the build-up method in business valuation. For example, the royalty premium data can help licensing professionals determine a royalty rate when converting a non-exclusive license to an exclusive one or adjust royalty rate for early-stage vs. advanced-stage technology.
The LES Royalty Rates and Deal Terms Surveys: A Backgrounder
LES USA and Canada’s hallmark Royalty Survey Program includes three flagship Surveys, High Tech, Life Sciences, and Physical Sciences (formerly Chemicals, Energy, Environmental and Materials/CEEM). LES Life Sciences Sector spearheaded the Survey program by launching the first LES Life Sciences Survey in 2008, and has conducted six surveys since then. The Life Sciences Survey database contains the survey data from 2005 to 2021.
The inaugural High Tech Royalty Survey was conducted in 2011, covering the time period of 2008 to 2011. Since then, three additional surveys have been conducted in 2014, 2017, and 2021. With the 2021 Survey results, LES High Tech Royalty Survey has the data over a time span of 14 years from 2008 to 2021.
According to the schedule during the past several years, the Life Sciences Survey is supposed to be conducted every two years with a one-year interval, and High Tech Survey, every three years with a two-year interval. Both Surveys were scheduled for 2020 but were postponed for a year to 2021 because of the pandemic.
The third flagship Survey, the Physical Sciences Survey, known as CEEM Survey back then, was first launched in 2010. LES decided to reactivate the Survey in 2022. The Survey is currently ongoing, and is expected to close in November.
Over the years, LES USA and Canada has been working its parent organization LES International (LESI) through which to reach the country Societies over the world. However, the 2021 Surveys marked the first ever coordinated efforts in preparing and conducting the Surveys between LES USA and Canada on the one hand, and LESI and its other country Societies on the other hand. As a result, nearly a third of the High Tech Survey responses and a quarter of the Life Sciences Survey response were from international societies.
LES USA and Canada understands the concerns of those surveyed over confidentiality, and has taken multiple measures to address the issues from the very beginning. Since the 2000s, LES has used a third-party consultancy firm, Vault Consulting, to manage and perform the Surveys, including distributing the questionaries and collecting the results for each of the three Surveys. The LES teams do not have access to the identities of the submitters. All data provided by Vault is clear of confidential data and cannot, in any way, be tied back to any individual respondents.
Upon receiving the data from Vault Consulting, a team of volunteer analysts in LES will process data, conduct analysis, present results, and write reports. Traditionally, the Life Sciences Survey analysis team presents the Survey results in Power Point presentation, and its 2021 Survey presentation includes a total of 160 slides. By contrast, High Tech Survey analysis team chooses to write a report. The 2021 High Tech Survey Report has 54 pages with 17,000 words and 48 charts and tables. As an important element of the membership benefit package, LES offers all of its Reports from three flagship Surveys over the years for free to its members.
During the LES 2022 Annual Meeting in San Francisco from October 16 to 19, 2022, the analysis teams of the Life Sciences and High Tech Surveys will present the results by diving into the details and demonstrating how to leverage the Survey results to assist license negotiation and determine royalty rate.
Key Insights and Major Conclusions from the 2021 Royalty Surveys
The Life Sciences Royalty Survey was launched in June 2021 and closed in November 2021. The questionaries were sent to 4,164 LES USA and Canada members and the international members of LESI in Life Sciences sector. A total of 116 deals with completed information were collected.
The High Tech Royalty Survey was launched on July 14, 2021 and closed on November 30, 2021. The questionaries were delivered to more than 12,000 surveyees worldwide. A total of 58 submissions were made by survey respondents, and an additional 103 license deals were submitted by certain anonymous entities that chose to not use the survey questionaries.
The following sections summarize the major insights from the 2021 Surveys and illustrate how to use the insights to address the challenges in license negotiation and royalty determination.
1. An Update: What’s Been Happening in the Licensing Market over the Past Few Years
The analysis teams of the Life Sciences and High Tech Surveys tabulated the descriptive statistics of financial and non-financial terms by various categorizations, including organization type and size of the parties (licensees vs. licensors), the major reason for a deal or the rationales to enter a deal, peak sales of the licensed products, technology type, field of use, IP types licensed, technology development stage, and exclusivity, among various others. For IP professionals who need reference data handy, the descriptive statistics of royalty rates and lump sum payments in the Reports will offer highly useful benchmark data by the categories.
For example, 62% of all deals submitted in the Life Sciences Survey were in preclinical stage of development, and 67% of the deals in the High Tech Survey were in R&D, patenting (invention disclosure), and prototype stages. The average and median royalty rates reported by the 2021 High Tech Survey were 4.82% and 4.75% respectively. The average flat royalty rate for the earliest stage product was approximately 5%, according to the 2021 Life Sciences Survey.
Comparing the 2021 Life Sciences and High Tech Surveys also yields some very interesting contrasts. As shown in Table 1 below, while 84% of the deals in the Life Sciences Survey were exclusive, exclusive deals accounted for only 43% of the deals in the 2021 High Tech Survey. Also, among the deals adopting percentage royalty rates, 79% of those in the High Tech Survey used flat rates, and 21% had tiered rates. By contrast, flat and tier rate methods essentially equally split the deals in the Life Sciences Survey. Additionally, it seems that the parties in the deals reported by the Life Sciences Survey tended to be larger than their counterparts in the High Tech Survey, and that the peak annual sales of most licensed products in the High Tech Survey were much smaller than those in the Life Sciences Survey.
Table 1. High Tech Survey vs. Life Sciences Survey: Some Examples
2. A Look Back: Historical View of the Licensing Market Since 2000s
The 2021 Life Sciences and High Tech Royalty Survey Reports also provide a review of the evolution of the licensing market since 2000s. As an example, based on the data from the past six Life Sciences surveys since 2009, the average royalty rate for preclinical deals across all therapeutic areas was 4.6%.
Chart 1, which is an adapted version of slide 60 of the 2021 Life Sciences Survey Report, offers further details about the royalty rate distribution of preclinical deals from the past six Life Sciences surveys. It shows that the 2021 Survey had a greater share of deals, with the royalty rate below 3%, and that prior surveys collected more deals with higher rates. This said, the general distribution of royalty rates for preclinical deals in the 2021 Survey was similar to the earlier surveys, according to the 2021 Life Sciences Survey Report.
Chart 1. Distribution of Flat Royalty Rates for Preclinical Deals:
The Past Six Life Sciences Surveys Since 2009
The 2021 High Tech Royalty Survey Report calculates the average and median royalty rates for each of the four surveys, as shown in Chart 2. The chart displays that the average royalty rates fluctuated across the four surveys but generally trended down since the 2011 Survey. By contrast, the median royalty rates tended to be relatively stable, remaining at 5%, despite the dip in the 2021 Survey. The 2021 High Tech Royalty Survey Report also presents annual average and median rate for each year since 2008, which provides additional details about the dynamics of the licensing market as reflected by the changes in royalty rates, as demonstrated by Chart 3.
Chart 2. Average and Median Royalty Rates: 2021, 2017, 2014 and 2011 High Tech Royalty Surveys
The fluctuation of average annual rates, as well as the generally downward trend of the rates in Chart 3, may have reflected the structural changes in the licensing market since the enactment of the America Invents Act (AIA) in 2011, which introduced inter partes review (IPR) proceedings in late 2012, as covered in great detail in the 2017 High Tech Survey Report. The effects of the AIA and IPRs were further compounded by the impact from a series of rulings by the U.S. Supreme Court since then, including Mayo v. Prometheus (2012), Alice v. CLS Bank (2014), TC Heartland v. Kraft Foods Group Brands (2017), and Oil States v. Greene’s Energy (2018), among various others. The peaks and troughs in Chart 3 vividly illustrate how the licensing market reacted to, and priced the effects of, these major events.
Chart 3. Annual Average and Median Royalty Rates: 2008 – 2021
LES High Tech Royalty Surveys
Econometric analysis in the 2021 High Tech Survey Report lends further testimony to the valuation impact of these events. The declines in royalty rates and lump sum payments during the post-AIA/IPR and especially post-Alice period are statistically significant, reflecting the fact that the parties in the licensing market have been adjusting their risk-return expectations based on their assessment of the effects of such events on licensing negotiation. While declining royalties reduce the licensing income for patent licensors, it saves royalty cost for licensees. The regression analysis also indicates that most of the effects from the market factors may have been exerted through changing the practices of licensing, which in turn, alters the value contributions of major license parameters such as exclusivity and technology development stage etc..
3. Applying Insights from Royalty Surveys to Assist License Negotiation and Determine Royalty Rate: Toward an LES Build-up Method for Royalty Determination
In addition to providing an update on current status of the licensing market and a historical view of market evolution since 2000s, the 2021 LES Royalty Survey Reports, based on the deep insights revealed from the data, have developed some invaluable solutions and methods for licensing negotiation and royalty determination.
For example, innovation economics dictates that technologies in advanced stages, compared to their peers in early stages, have much lower technical risk and less market uncertainty, and accordingly shall command price premiums in the licensing market. The 2021 LES Life Sciences Survey Report has offered direct empirical evidence to support this theory.
Chart 4, which is made from the data disclosed in slide 58 of the LES 2021 Life Sciences Survey Report, displays the average royalty rate of the deals with technologies that have achieved proof of concept (POC) stage, in contrast to that of the deals with technologies that have not. The multiplier of the post-POC rate over pre-POC rate, as implied by Chart 4, provides a very useful pricing guide for licensing professionals to negotiate a reasonable royalty rate when the stage of technology development is among the key value-determining factors.
Chart 4. Average Royalty Rate by Stage of Development: Pre-POC vs. Post-POC
Based on the data from the 2021 Life Sciences Survey Report
The 2021 LES High Tech Report has a similar chart, though based on a different categorization of technology development stages, which includes R&D, patenting (i.e., invention disclosure), prototype, fully developed and in production. The Report shows that technologies at their advanced stages in technology development cycle, i.e., at fully-developed stage or in-production stage, would command much higher royalty rate than those in earlier stages.
In light of this observation, the LES 2021 High Tech Survey Report uses econometric models to identify and quantify the value contributions of key parameters of license deals, measured by royalty premiums or discounts. For example, according to the analysis on royalty rate samples, by technology type, the technologies in aerospace, software, medical and healthcare areas carry significant royalty premiums. So do exclusive licenses, the deals with technologies in their advanced stages, and those involving knowhow, drawings and designs.
Among the important advantages of econometric analysis is that it is able to identify and quantify the royalty rate premiums or discounts after controlling for the valuation effects of all other significant license parameters and market factors. In other words, a premium or discount yielded by econometric analysis represents the pure or net valuation contribution of the corresponding market factor or license parameter, after isolating and removing the valuation effects of all other significant compounding elements.
Chart 5 below illustrates how the LES High Tech Royalty Survey Report applies the advanced-stage technology premium from econometric analysis for royalty rate determination. Essentially, starting from the royalty rate for a license with early-stage technology, one can build up the royalty rate for a license with advanced-stage technology by simply adding the advanced-stage premium to the royalty rate of the early-stage technology. Similarly, one can use the exclusivity premium to determine the royalty rate when converting a non-exclusive license to an exclusive one; or vice versa.
During the LES USA and Canada 2022 Annual Meeting , the LES High Tech Royalty Survey analysis team will walk through a case study of how to adjust royalty rate in a nonexclusive license with advanced-stage technology to determine the royalty rate for an exclusive license with early-stage technology, by applying the exclusivity premium and the advanced-stage premium quantified in the Survey Report.
The ultimate goal of the LES Royalty Surveys is to develop a royalty valuation method that would be analogous to the build-up method in business valuation. The assumptions are that each parameter (such as exclusivity, technology development stage, IP type, and licensor organization types, among various others) of a license agreement has its own value contribution to royalty determination and that the royalty stipulated in an agreement reflects the value contribution from each of the parameters.
Chart 5. Premium for Advanced-Stage Technologies
Based on the data from the 2021 High Tech Survey Report
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FAQs
What is a reasonable royalty rate? ›
A 'reasonable royalty rate' is an estimation of damages in patent infringement cases. It is often referred to as established royalty that a licensee would pay for the rights to the patented invention in a hypothetical negotiation.
What is a typical royalty percentage? ›Royalty Rate For Services
The average royalty percentage applied to licensed services varies between 2-15 percent of the total buy, depending on the attractiveness of the property.
Arithmetically, royalty (on sales) can be expressed as: Royalty = Payment-to-licensor/Product-sales-price.
How much should I ask for royalties? ›Well, royalty rates vary across book formats like prints or ebooks. They also vary across publishers (if you're on the traditional route) as well as stores (if you're self-publishing to them directly). Generally, the average royalty rate is around 10% under traditional publishing and up to 70% under self-publishing.
What is the 25 percent rule? ›The 25% rule is an income-based approach
The 25% rule can be used as a starting point for valuing and setting fair royalty rates for intellectual property assets including copyrights, trademarks and patents in licensing deals. It is an example of an income-based approach.
The average royalty for licensing an invention is 3 to 6 percent of the product's wholesale price, which is the price the company charges the consumer. If you have a profitable product and choose the right manufacturer, a licensing agreement can be a great way to make money from your invention.
Are royalties based on sales or profits? ›A business that makes money by using intellectual property that belongs to someone else will likely have to pay royalties to the owner of that property. Royalties are commonly based on net sales rather than profits, because sales-based royalties deliver a greater guarantee that a property owner will be compensated.
What happens to royalties when an author dies? ›In the United States, royalties are paid to the author's heirs and are part of the estate.
How many types of royalty are there? ›Some of the more common types of royalties are book royalties, performance royalties, patent royalties, franchise royalties, and mineral royalties. Book royalties: They are paid to authors by publishers.
How many years are royalties paid? ›For artists in the US, the copyright protection of a song lasts for the lifetime of the copyright holder and an additional 70 years after their demise. This law applies to all bodies of works that have been published since 1978. The payment on these royalties also lasts for the duration of the copyright protection.
How long do book royalties last? ›
How long do book royalties last? In most cases, book royalties are paid out for the life of the copyright, which is typically 70 years after the author's death.
What is a 10 percent royalty? ›Example: 10,000 copies of a $20 book with a 10 percent cover-price royalty will earn him $20,000.
What are the 4 types of royalties? ›When you release a new song, make sure you get the most for your work by understanding which of the four types of royalties apply to you. Between mechanical royalties, performance royalties, synch royalties, and print music royalties, it's entirely possible to make a decent living as a musician.
How are royalties calculated and paid? ›Royalty payments are calculated on the types of royalty agreement made between two parties – it can be calculated on gross revenue, net revenue, price per unit, minimum sale, or fixed amount. Basically, a percentage of net revenue is given to the owner for exploitation of licensor's intellectual property.
What percentage of royalties do authors get? ›Royalty rates vary slightly, but on average, you can expect the following from traditional publishers: Hardcover sales: 15% Trade paperback sales: 7.5% Mass-market paperback sales: 5%
What is the 4% rule? ›One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.
Does the 4% rule work for early retirement? ›While following the 4% rule can make it more likely that your retirement savings will last the remainder of your life, it doesn't guarantee it. The rule is based on the past performance of the markets, so it doesn't necessarily predict the future.
How much do you need to retire 25x? ›The first is the rule of 25: You should have 25 times your planned annual spending saved before you retire. That means that if you plan to spend $30,000 during your first year in retirement, you should have $750,000 invested when you walk away from your desk.
How much is my invention worth? ›The value is determined by whether the invention is patentable, by the amount of money you can make through selling products or services under the patent, and by any licensing fees you can obtain from others interested in your invention.
What is the average patent royalty fee? ›Typically, royalties are paid as a percentage of the product's gross sales. The typical percentage for royalty payments will be 3-5%.
How do I get paid for my invention idea? ›
If you happen to find a manufacturer that is interested in your invention, there are usually two options. You can sell your invention idea, or you can outright sell the invention itself for one large lump sum as compensation for your idea. The second option is to enter a licensing agreement.
How often are royalties paid out? ›These payments are then collected by Collection Agencies or Mechanical Rights Organizations and then they pay the artist a lump-sum of these royalties after a certain amount of time (usually every 6 months).
What happens to royalties when a company is sold? ›Royalties are a percentage of sales revenue, in no way related to company ownership or even profits usually. So no lump sum like you think. Also, it's extremely unlikely that anyone would buy a company where they would have to turn over 9% of the sales revenue in perpetuity to the previous owners. Save this answer.
Are royalties taxed differently? ›Royalties. Royalties from copyrights, patents, and oil, gas and mineral properties are taxable as ordinary income. You generally report royalties in Part I of Schedule E (Form 1040 or Form 1040-SR), Supplemental Income and Loss.
Who receives royalties after death? ›If you die intestate, your property is divvied up according to a legal formula put into play by your state's legislature, typically handing over your assets to your spouse and children. Your author royalties are legally viewed as intellectual property.
Can royalties be inherited? ›For example, copyrights and assignment of royalties are both assets that can be transferred into your trust during life and then more easily transferred to your designated beneficiaries after your death.
Who gets paid when an author dies? ›Who Gets The Money From Dead Authors Books? Authors' heirs claim the royalties from the copyright. the heirs die within fifty years after the author passes away, their share of the copyright will be turned over to them by their heirs.
Which royal family is the richest? ›The Royal Family Of Saudi Arabia
The family's net worth is about $1.4 trillion. The present ruler, King Salman Al Saud is reportedly the richest member of the family.
It is the minimum sum that is given to the lessor of a property by the lessee so that the lessor receives a minimum amount of sum for a specific period. And the situation where he gets a benefit from or not is called the minimum rent.
What is the royal blood? ›Definition of blood royal
: royal family specifically : those members of the royal family by birth a prince of the blood royal.
What is a reasonable royalty rate for a trademark? ›
The royalty rate passes this check if a reasonable part of the profit of the licensed business is for the trademark license, often between 25% and 33%, depending on the trademark and the profit base. This method is called the profit split, and the 25%-33% range is the profit split rule of thumb.
What is a 10 percent royalty? ›Example: 10,000 copies of a $20 book with a 10 percent cover-price royalty will earn him $20,000.
Are royalties paid on gross or net? ›Royalties are commonly based on net sales rather than profits, because sales-based royalties deliver a greater guarantee that a property owner will be compensated.
What is ongoing royalty fee? ›A royalty fee is an ongoing fee that a franchisee pays to the franchisor. This fee is usually paid weekly, monthly, or quarterly, and is typically calculated as a percentage of gross sales.
What percentage of royalties do authors get? ›Royalty rates vary slightly, but on average, you can expect the following from traditional publishers: Hardcover sales: 15% Trade paperback sales: 7.5% Mass-market paperback sales: 5%
What is the difference between a royalty and trademark? ›Trademark royalties are the payments a licensee makes to a licensor in exchange for the use of their trademark. Trademark royalty rates are usually a percentage of the revenue generated by the trademark, and ensure that both parties benefit fairly from the trademark licensing agreement.
What is the average patent royalty fee? ›Typically, royalties are paid as a percentage of the product's gross sales. The typical percentage for royalty payments will be 3-5%.
What are the 4 types of royalties? ›When you release a new song, make sure you get the most for your work by understanding which of the four types of royalties apply to you. Between mechanical royalties, performance royalties, synch royalties, and print music royalties, it's entirely possible to make a decent living as a musician.
Do NFT artists make money? ›An NFT artist average hourly rate in the United States as of August 16th, 2022, is $19.91, according to Zip Recruiter.
How often are royalties paid out? ›These payments are then collected by Collection Agencies or Mechanical Rights Organizations and then they pay the artist a lump-sum of these royalties after a certain amount of time (usually every 6 months).
How many types of royalty are there? ›
Some of the more common types of royalties are book royalties, performance royalties, patent royalties, franchise royalties, and mineral royalties. Book royalties: They are paid to authors by publishers.
How long do royalties last? ›For artists in the US, the copyright protection of a song lasts for the lifetime of the copyright holder and an additional 70 years after their demise. This law applies to all bodies of works that have been published since 1978. The payment on these royalties also lasts for the duration of the copyright protection.
Are royalties profit? ›Royalties were created to provide compensation for an owner's assets use, and these agreements are legally binding. A royalty will be based on your net sales instead of profits to make sure the asset owner is compensated for the use.
Why do franchise owners pay royalties? ›The payments are used to maintain the system and ensure that all avenues flow smoothly between the franchisor and franchisee. Royalty payments are typically paid to the franchisor to stay current on technological advances, as well as to enable the creation and marketing of fresh products and services.
What is the best franchise in the world? ›| Rank | Name | Industry |
|---|---|---|
| 1 | KFC | Food Franchises |
| 2 | 7-Eleven | Retail Franchises |
| 3 | McDonald's | Fast Food Franchises |
| 4 | Marriott International | Travel Franchises |
Royalty fees are incurred on a regular basis and are paid in a set timeline (for example, monthly, quarterly or annually). Royalty Fees should not be confused with the Initial Franchise Fee, which is a one-time payment made by the franchisee when the business relationship with the franchisor commences.