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Andy Brice
Successful Software

Doug Nebeker ("Doug")

Jonathan Matthews
Creator of DeepTrawl, CloudTrawl, and LeapDoc

Nicholas Hebb
BreezeTree Software

Bob Walsh
host, Startup Success Podcast author of The Web Startup Success Guide and Micro-ISV: From Vision To Reality

Patrick McKenzie
Bingo Card Creator

Royalties on Software?

For the stake of argument, I'm defining a royalty as a percentage of the profits.

Right now, I can't think of any companies that openly pay a royalty on software - can you?

Also consider that the music industry has similar distribution costs and music is a similarly creative endeavor. They have a working royalty model (arguably unfairly biased, but it exists).  They both depend on specific hardware (radios and CD players in the case of music). What's the difference between software and music that makes royalties impractical?

Or is it largely due to the smarts of the initial software vendors?
Tuesday, February 20, 2007
We had deals with Konami, Atari, NAMCO, Midway, Universal just to name a few. The standard model for an external studio is advances plus royalties (less the advances).
Tuesday, February 20, 2007
I think they do not pay royalties because that would mean that someone would own the intellectual property found in their products. Royalties go to whoever owns the rights to a song and in most cases the company that makes software owns the rights to it. If a company gave the rights to a specific person they would loose them if he/she left the company.
Nick Send private email
Tuesday, February 20, 2007
There royalties on software, it is very common.  It's just that they are not generally paid to individuals (companies prefer to hire the individuals and own the copyright outright as a work for hire).

It used to be very common to have libraries and toolkits that required the entity using the library/toolkit pay for each copy distributed.  Of course, a new competitor entering the market has an obvious point of attack: sell their toolkit or library for 1 time price with no royalty.  Thus these types of libraries have largely, but not completely, disappeared in all but niche markets.

Also companies used to license the unix source code from AT&T, make their own version for their hardware, and pay AT&T a per copy royalty. The only way to get out of paying the royalty was to stop distributing it, or to pay a big lump sum to buy out your license.

Also MS did it too, I'm sure. the early BASIC-type languages, DOS operating systems, I think even very early version of windows, were all sold via OEMs, who paid MS a royalty for each copy they distributed, and who could in some cases, customize the stuff before they resold it.
S. Tanna
Tuesday, February 20, 2007
I don't know about now, but you used to be able to license 3rd-party controls for which you'd pay, not a per-developer license, but a per-user run-time license (which is like paying royalties).
Christopher Wells Send private email
Tuesday, February 20, 2007
And by the time you have half a dozen libraries with a reasonable and sensible 5% royalty and a couple that consider pi to be a sensible value to use for calculating royalties, you have a logistical nightmare for the financial auditing team (as well as paying a huge percentage of the revenue in royalties for a much smaller percentage of the application functionality), shortly followed by an instruction to not use any such library.

Unless the overall total long-term cost of the component (and managing appropriate financial records) is significantly less than the cost of developing it in-house from scratch, it's just not worth the effort.

Many component vendors charged tens or even hundreds of times more than was actually justifiable, and still felt bad because they thought that 5% per component was too low, even if a mere 20 components would add up to 100% of the revenue from the entire end product. Clearly few components cover 5% of an application's functionality and also justify not rewriting from scratch and paying the developer a fix wage for the duration of the development process.

Tuesday, February 20, 2007
Most of the stuff I see is something like $x plus $y per copy. I've never seen a percentage royalty in software. It doesn't make sense much to do things that way. e.g. Sure! I'll pay you a 50% royalty for every copy that I sell of my freeware...
Ryan Smyth Send private email
Wednesday, February 21, 2007
Microsoft licensed Spyglass for a base fee, plus a percentage of revenues royalty, http://en.wikipedia.org/wiki/Spyglass

Unfortunately for Spyglass, as in Ryan's example, IE was free
S. Tanna
Wednesday, February 21, 2007
Just a point of clarification to resolve a misconception that might have crept into this discussion.  A royalty is any payment used toward the use (but not outright sale) of an asset.  The term is normally used for IP assets (copyrights, trademarks, patents, etc.), but is also used elsewhere (eg. timber harvests).  As such, a royalty can be a fixed fee, a percentage of sales, or a fixed fee per sale. 

Royalties paid as a percentage of licence sales are common in the software industry, as with other industries dealing in copyrights (the recording and motion picture industries are perhaps the best examples).  Many licensing and distribution contracts between the software, recording, and motion picture industries look quite similar in this respect (I've spent some time studying examples from all three industries).

ROYALTY. n. "A financial consideration paid for the right to use a copyright or patent or to exercise a similar incorporeal right; payment made from the production from a property which the grantor still owns" (HG Fox, Law of Trade Marks and Unfair Competition, 3d ed, Toronto: Carswell 1972).


Chris Knight Send private email
Wednesday, February 21, 2007
It's because in software industry, companies think they can still reinvent the wheel and save a buck in the process.
The most common royalties we see in software is when the IP holder has a patent of some sort. It's the only way these days.
Wednesday, February 21, 2007

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