RoyaltyStat Blog

Residual Profit Split is an Avoidable Cul-de-Sac

Posted by Ednaldo Silva on Feb 21, 2017 4:20:07 PM

The claim that it is impossible to find comparable royalty rates and that from the start we should use the residual profit split method for high-value intangibles needs revisiting. This claim is made prima facie without regard for the license agreements available in curated databases such as RoyaltyStat, which as of today contains over 17,875 unique and unredacted license agreements. Also, adopting the residual profit split method, when separate tested party methods such as the TNMM could suffice, creates unwarranted costs and audit management challenges for both the taxpayer and the tax administration.

Royalty Rates for Medical Devices

Posted by Ednaldo Silva on Sep 27, 2016 11:42:30 AM

Naive analysts use the normal (Gauss-Laplace) distribution to compute the mean and standard deviation, or quartiles, without verifying if the data are abiding. Double fault is committed when they propose a “broad and unconvincing” range of data, such as the interquartile range (IQR), which may become useless to determine arm’s length (or reasonable) royalty rates. In practice, the interquartile range of royalty rates is used to help settle licensing disputes in tax or intellectual property valuation. 

Royalty Rates for Utility Patents

Posted by Ednaldo Silva on Apr 12, 2016 1:57:39 PM

The number of utility patents per license agreement primarily from two high-tech industries shows that most utility patent agreements include one patent number. The number of utility patents per agreement is a hyperbola. It's revealing that the interquartile range of royalty rates does not vary much considering the changing number of patents per agreement. In fact, the median royalty rate is stable at 5%, irrespective of the number of patents per agreement. This suggests that in addition to a stable median royalty rate,

Cross-Country Royalty Rates Converge

Posted by Ednaldo Silva on Mar 23, 2016 3:20:00 PM

Cross-country royalty rates based on the licensee's sales converge to a narrow range of median values from 6% to 10%, independent of sample size. The chart below shows the sample size (count) and median revenue-based royalty rates in several countries. The royalty rates on the chart convey several licensing rights, including patent, know-how, software, and trademark.

The two search criteria used in the RoyaltyStat database of unredacted license agreements were: (i) royalty rates must be based on net sales (revenue, turnover), and (ii) they must exclude related parties. Among the top eight countries, the U.S. has the biggest number of unredacted license agreements (count is 3,202, median royalty rate is 6%), followed by Canada (847, 7%), Mexico (384, 7%), China (339, 10%), Japan (256, 6.75%), U.K. (185, 9%), Germany (121, 9%), and France (108, 7.75%).

Overall, considering 13,025 unredacted license agreements with royalty rates based on net sales, excluding related parties, the median royalty rate is 5%; the lower quartile is 3.7%, and upper quartile is 10%. Data were retrieved from RoyaltyStat on March 17, 2016.

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Royalty Rates in Patent Infringement

Posted by Ednaldo Silva on Mar 7, 2016 8:38:01 PM

Roy Epstein & Paul Malherbe published a serious paper (2011) about comparable royalty rates used to determine patent damages in legal proceedings. However, they make several factual claims whose validity is compromised by the paucity of data examined. Despite the use of incomplete information, Epstein & Malherbe enumerate certain pitfalls of using royalty rates databases that we challenge as fallacious. See http://www.royepstein.com/Epstein%20&%20Malherbe%20-%202011.03.28%20-%20EPE%20(final%20AIPLA%20revisions).pdf

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:

Royalty Rates Are Great Ratios

Posted by Ednaldo Silva on Feb 29, 2016 2:18:03 PM

A very large sample of royalty rates (based on net sales) derived from unredacted license agreements, excluding related party licensor and licensee, shows a stable median of 5% or 6%. The sample count of 12,987 unique license agreements was retrieved from RoyaltyStat on February 29, 2016. This long-term stability supports my prior post conjecturing that royalty rates are "great ratios," i.e., stable ratios that can be treated as a "stylized fact" à la Kaldor. See Nicholas Kaldor in the proceedings of the "theory of capital" conference held in the Island of Corfu from Sept. 4-11, 1958, published in Frederich Lutz & D. Hague (eds.), The Theory of Capital (Macmillan, 1963), chapter 10. See also Lawrence Klein & Richard Kosobud, "Some Econometrics of Growth: Great Ratios of Economics," Quarterly Journal of Economics, Vol. 75, No. 2 (May, 1961). Stable URL: http://www.jstor.org/stable/1884198

It's difficult to ignore this long-term stability of royalty rates around a 5% or more recent 6% central value. The outlier values prior to 1984 and in 2015 reflect the smaller number of observations in those years. We will capture more unredacted license agreements having the effective date in 2015 as we progress in 2016. Thus, the higher median royalty rate observed in 2015 is expected to gravitate towards the long-term median of 5% to 6% as the 2015 sample size increases towards the historical annual count exceeding 1,200 new unredacted license agreements added to the RoyaltyStat database.

Royalty Rates Large & Small

Posted by Ednaldo Silva on Feb 12, 2016 4:03:39 PM

The claim that comparable royalty rates can’t be found is not well-informed, and needs revision.

RoyaltyStat has a larger number of unredacted license agreements than the number of listed companies available to find comparables among distributors, retailers, or service providers. RoyaltyStat contains over 16,995 unredacted license agreements, and this count increases by over 1,200 new agreements per year.  (See http://www.royaltystat.com/ourdatabases.cfm.) An unredacted license agreement contains a disclosed royalty rate, whereas a redacted agreement has no disclosed royalty rate.