RoyaltyStat Blog

Royalty Rates Are Stable Across Industries

Posted by Ednaldo Silva on Mar 7, 2016 7:07:16 AM

The center of gravity of royalty rates, measured by the median, is stable at 5% or 6% across industries. The sampled royalty rates are derived from unredacted license agreements from which the individual contractual terms can be compared. Except for Internet (Cyberspace) license agreements, a large sample (count = 13,004) of royalty rates shows that industry is not a key differentiator of the center of gravity. The cross-industry sample includes only royalty rates based on net sales, excluding related parties. Two hypotheses can be postulated subject to empirical testing based on resampling of the royalty rates data:

H1: There is a contractual difference if the license agreement conveys a fixed versus tiered royalty rate.

H2: There is a contractual difference if the license agreement conveys other payments in addition to the disclosed royalty rate, such as upfront fees, milestone payments, and ancillary debt (or equity) investing arrangements.

These contractual differences are likely to influence the profit potential of the comparable license agreements, but not necessarily influence the applicable royalty rate. Profit potential can be measured by the sum of the anticipated revenue to be derived by the licensee during the expected life of the licensed intangibles. Following is a chart showing the cross-industry stability of the median royalty rates based on net sales (revenue, turnover), excluding related parties. The royalty rates were retrieved from RoyaltyStat on March 5, 2016.

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Ednaldo Silva (Ph.D.) is founder and managing director at RoyaltyStat. He helped draft the US transfer pricing regulations and developed the comparable profits method called TNNM by the OECD. He can be contacted at: esilva@royaltystat.com

RoyaltyStat provides premier online databases of royalty rates extracted from unredacted agreements, normalized company financials (income statement, balance sheet, cash flow), and annual reports. We provide high-quality data, built-in analytical tools, customer training and attentive technical support.

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Topics: Royalty Rates