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What is a typical (or average) royalty amount expressed in dollar amounts or percentage for products (i.e. tshirts) using licensed images (i.e. characters from video games, movies, etc.)?
Hello! Thanks for asking Wonder about the average royalty rates for licensing images, such as characters from video games or movies. The most useful sources I found to response to your query were NOLO, EY, and Hollywood Reporter.
In short, there are many variables that come into play when licensing agreements are penned, as well as many ways a deal can be arranged. In 2016, the average royalty rate for licensed merchandise in the media and entertainment industry jumped from 8.2% to 8.5%. On average, royalty rates for licensed merchandise falls in the 2-10% of net sales range. Below, please find the results of my research.
Please note that I am not an intellectual property attorney, and this response should not be taken as legal advice.
AVERAGE ROYALTY RATES
According to a 2016 industry report at Hollywood Reporter, character and entertainment are the top licensing property segment, accounting for 45% of global licensed product sales. Apparel held the highest market share at 15.1%. Average royalty rates for licensed merchandise in the media and entertainment industry rose from 8.2% to 8.5%, largely due to the popularity of Star Wars.
"• Greeting cards and gift wrap: 2% to 5%
• Household items such as cups, sheets, towels: 3% to 8%
• Fabrics, apparel (T-shirts, caps, decals): 2% to 10%
• Posters and prints: 10% or more
• Toys and dolls: 3% to 8%"
An article at Intellectual Property Law Firms states, "To use a trademark on merchandise such as clothing or ceramic goods, a licensee must pay royalties ranging from 2% to 10% of net sales. A trademark owner may accept a lump-sum payment for a one-time license—for example, the use of the image on 10,000 T-shirts at a sporting event."
LICENSING PROCESS
There are many variables that come into play when licensing images, "fixed, lump sum, quarterly, annually and as a percentage of sales." Therefore, it is advisable to consult an intellectual property attorney who can sift through all the applicable laws and processes. However, I found a couple of articles that offer some high-level insight into the overall process.
When an artist licenses their work, they maintain legal ownership of the artwork, while allowing someone else to use the artwork to produce and sell merchandise. The artist/owner receive royalties in exchange for granting licensing rights. "Sales- or usage-based royalties" are common in the licensing of intellectual property (IP), meaning a licensee pays a percentage of the merchandise sales to the licensor. Sometimes, an "advance on royalties" is negotiated, which amounts to an up-front payment to the artist/owner based on expected sales. Occasionally, a "one-time license fee" is paid at the outset of a license agreement.
Deductions for taxes, returns, credits, or discounts are often excluded prior to the royalty calculations, so understanding this part of a licensing contract can to crucial to understand the final royalty amount. Occasionally, a "per unit royalty" is negotiated, tying royalties to the number of merchandise units sold.
A "guaranteed minimum annual royalty payment" (GMAR) might occur when a long license is desired. This type of agreement ensures a regular payment (usually yearly), regardless of sales. If sales exceed the GMAR, then the artist is paid the difference at the end of the year. An EY report notes that media and entertainment (M&E) arrangements "commonly include a nonrefundable minimum guarantee (MG) that effectively establishes a floor for the amount of consideration to be paid to the licensor. The MG is referred to in the industry as being “recouped against” sales- or usage-based royalties the licensor would have earned. The licensor earns additional sales- or usage-based royalties when the royalties exceed the nonrefundable MG."
Symbolic IPs, which would include film or video game characters, may incorporate an MG as well as sales-based royalties. The EY reports offers an illustration (page 9) of how a symbolic IP license might work. The example states, "A producer of an animated film enters into a five-year arrangement with a clothing manufacturer to license the film’s character images (symbolic IP) for the production of film-related merchandise. The license requires the clothing manufacturer to pay a sales-based royalty of 5% of its gross sales; however, the contract includes a guarantee that the producer will receive a minimum of $5 million for the entire five-year period." It then offers a chart that shows how the royalties would be paid out over five years.
Tiered or adjustable royalty rates allow for increased royalties as revenues from merchandise sales increase. Typically, in this scenario, the royalty rate increases by certain agreed-upon increments, based on sales. "For example, the royalty starts at 6% and increases to 7.5% once the licensee reaches one million dollars in sales or a million units. It then increases to a maximum of 9% once they hit 5 million dollars (or units)."
SUMMARY
To sum up, typical royalty rates for clothing or other licensed merchandise range from 2-10%, with M&E industry royalty rates hitting an average of 8.5% in 2016.
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