By Hanniz Lam
You know it’s Christmas time when you hear Mariah Carey’s “All I Want for Christmas is You” playing on the radio daily.
Holiday queen Mariah Carey earned a whopping $60 million in streaming royalties for her classic Christmas hit “All I Want For Christmas Is You” yearly.
So now you’re thinking, “I want to earn royaties too!”
What Are Royalties?
Royalties are payments that buy the right to use someone else’s property. Royalties stem from licensing, which is the process of giving or getting permission to have, produce, or use something that someone else has created or owns.
In other words, when you keep the ownership of the property and get royalties from someone for use of that property, that is licensing. Licensing your business’s intellectual property and getting royalties from these licenses is a common way to increase your business income.
Royalties appear in many different industries, but they serve a similar purpose in all uses. Royalties also protect the buyer from claims by the owner for improper use.
Royalties for Writers
If you’re a writer, you write a book, you get the book professionally edited and produced, you put the book into the marketplace, you make sales, you get money.
You have to pay the editor and book designer and cover artist, yes, but then all the money that comes in from sales belongs to you, minus some small fees for distribution in ebook markets and the production costs of having paperbacks made via print-on-demand.
In some ways, calling the revenue from self-publishing sales “royalties,” like Amazon does, is misleading.
That’s because you haven’t actually licensed your book to them—they’re really charging a distribution fee for their services. Royalties are something else entirely.
What Does Advance Against Royalties Mean?
Advances are an advance on payment—which in this case means royalties.
Advances are calculated based on how many copies of your book the publisher THINKS they can sell in the first year, run through a standard royalty calculation.
In publishing, an “advance against royalties” is an advanced payment that will be offset by future royalty payments.
So if the publisher THINKS they can sell a gazillion copies of your book in a year, they might offer a $500,000 advance—because they estimate that you’d receive $500,000 in royalties under their formula in that year (more on that shortly).
Earning Out
What you need to remember, though, is that you won’t receive a sen more until your advance earns out, which means that you actually sell the number of books it would take to earn that amount in royalties.
Which isn’t guaranteed.
How Are Book Royalties Calculated?
If advances are like payday loans, then royalties are like bill payments—they happen regularly in exchange for giving something of value.
Licensing
In a traditional publishing contract, you’re actually licensing your work to the publisher. You wrote the book, you own the intellectual rights in it, and you’re asking the publisher to help you bring it to market and get other people to pay for it.
So instead of paying out of your pocket to get the book edited and designed, like in self-publishing, you’re asking the traditional publisher to do that for you.
In exchange, the publisher wants some money because they’re paying for editors, compositors, cover artists, PR and marketing people, printing costs, distribution, and so on.
So what happens is that you license your work to the publisher. They produce the book and get it into the marketplace. When the book sells, the publisher keeps some of the money and pays you a licensing fee, which is your royalties.
Average Royalties
Most traditional publishing contracts have layers upon layers of different royalty calculations based on various benchmarks, and all of them can feel pretty small.
For instance, average royalties for a paperback book are usually 6-8%, while royalties for a hardcover are 8-10%.
That’s a percentage of the list price of the book—whatever the publisher has suggested that bookstores sell it for.
In the case of a paperback, that’s usually $5.99 to $8.99, while hardcovers tend to list at $24.99.
Ebook royalties vary, but tend to hover around 10% with many traditional publishers. Savvy publishers have started to raise royalties to about 25% for ebooks, as they know modern authors are smart enough to realize that publishers don’t have to pay for paper or shipping from their portion of ebook sales revenue, and so it’s only fair that digital copies should provide more income to the author!
However, this figure is based on gross revenue from the book instead of list price. Gross revenue means whatever money the publisher actually receives from a sale, rather than what the suggested selling price of the book is. So the figure your royalties are based on is the list price minus any discounts that were granted to the distributor, minus any physical production costs for a print book.
Royalties for Musicians
In music, royalties are paid to owners of copyrighted music. These are called performance royalties. You get paid royalty when your song is played on the radio station or used in a commercial, movie or TV show or public event.
Royalties for Photographers
Royalties may be paid for the use of your images, such as when someone adds your stock photography to their website or advertisement.
Royalties for Content Creators
Companies are turning to online content creators—bloggers, video creators, dancers, music artists, and more—for a new take on digital marketing and connecting with audiences. Content creators is a broad term describing anyone who makes digital content.
From web videos to blogs and more, creative partners run the gamut of content specialties and niches.
Consider YouTube: creators are producing comedy skits, DIY, daily vloggers, gaming streams, pranks, challenges, cooking videos—and that’s just a handful of the diverse content available on the video-only platform.
Royalties for Inventors
If someone wants to make or use a patented product that you created and patented, they will have to pay a royalty to you.
Royalties for Franchised Businesses
In franchised businesses, such as 7-Eleven convenience stores, the franchise holder pays franchise royalties to the main company for the use of the name and other assets.
What if you’re not a creator? Can you earn from Royalties?
The answer is YES!
There are numerous instances when artists who own royalties for a certain song or asset may need quick money.
This may be because they want to purchase a house, a car, or even grow another business.
Therefore, instead of waiting for the regular royalty payments, they opt to sell their rights to get the money they require to cater to their needs.
Instead of investors buying a company’s shares that are prone to daily fluctuations, they opt for an almost guaranteed income from the company’s revenue.
Venture Financing
The principle idea in venture financing is allowing investors to invest in a company, in exchange for owning part of the business.
This offers business owners enough capital to grow their business, while it also offers an investor a chance of earning money, when the business is sold, or listed on the stock market.
However, when the financing is royalty-based, it is not a requirement for the owner, to have joint-ownership with the investors.
Instead, the investors receive monthly payouts depending on the company’s revenue.
This is a form of hybrid business loan for small businesses, which combines assets, both from bank loans and venture-capital funding.
Royalty-based funding is a more flexible deal as the investors earn profits for their investment while the owner doesn’t have to share their ownership of the company.
Entertainment Royalties
When it comes to entertainment royalties, investors now have a chance to invest in the entertainment industry and earn passively.
They can invest and share in royalties generated from various mediums of entertainment such as music, book publishing, TV shows, and more.
And although the royalties are initially owned by the originator of the asset such as the songwriter or a book’s author, the owners do sometimes sell part of their ownership.
This allows investors to earn from assets they didn’t produce themselves.
By auctioning royalty income, the owner allows the buyer to earn subsequent royalties from the asset, in exchange for their investment.
List of Places to Buy Royalties
Now that you have learned about royalties and want to invest, where do you buy these royalties? If you are looking to buy royalties, here are some of the marketplaces that offer such services.
Without such companies, royalty owners can only liquidate their assets by selling their entire work or by locking up all their future royalties revenue to enable them to collateralize a loan.
However, through these market places, the royalty owners can easily sell part of their work to investors and raise the amount of money they require.
The company considers itself as the number one marketplace which connects the royalty buyers and sellers. The Royalty Exchange was initially founded as a private company in 2011, in Denver, CO.
It is an online marketplace for royalties, where one can buy royalties in various industries, including music, books, film, TV, pharmaceutical, intellectual property, oil, and more.
Through this company, the royalty owner puts up their asset (music, book, and more) for auction and sets a minimum bid that they are ready to take.
When the royalties are bought, the firm that pays royalties will deposit that money into an escrow account. From there, the royalties are now paid per quarter or after every six months.
SongVest offers a platform for artists and investors to sell and buy royalties, respectively.
Fans can invest in new and upcoming albums using a crowdfunding model, which in return offers them a portion of the royalties.
The money collected from investors allows artists to create albums and proceed to market them.
If you are looking an investment opportunity to create a passive income, royalties are a good one. They tend to be more stable, and you also don’t have to be there to earn.
