Royalty-Inclusive Deals
One way to license a product without the burden of calculating royalties or establishing minimum guarantees is to buy finished goods on a royalty-inclusive basis. In this way, the publisher is actually purchasing a finished product (paying for manufactured goods), but with the same rights that would be granted from a straight licensing deal. In other words, payment for the license includes both the IP rights and the physical product itself. This is a basic turnkey deal. The originating publisher or packager constructs a deal for a specified number of finished books for a set unit fee—and also takes a margin on the manufacturing. The fee in this case is “fully loaded,” meaning that the royalty is already built into the cost of goods.
This is a very simple way for everyone to calculate their risks and to keep the post-publication accounting issues to a minimum. It also simplifies the entire process for the licensee, since it doesn’t have to do any development work. It’s also a common way for a developer to work with multiple licensing deals at the same time; it can print several language versions at once to take advantage of printing economies.
But there are downsides to this type of deal. The amount of adaptation that the licensee can make is limited since the structure or layout and design of the content is predetermined and is used by more than one licensee. In addition, the buyer will have to commit to a substantial print run up-front in order to secure a favorable unit price point. Usually these print-runs are higher than the publisher would normally contract for if it controlled the production and manufacturing itself.
The Licensor Holds All the Cards
Terms for buying and selling rights are grounded in the basic economies of general publishing and take into consideration what both sides are able to bring to the table. As the originator of a product, the licensor has not only taken on the initial risks of the project, but has invested time and resources that the licensee does not have to invest. Even if the licensee now has to translate and perhaps even reconfigure the product, the original IP holder has provided a fully developed concept and decreased the licensee’s time to market.
My view is that as the originator of the product, the licensor is entitled to own any derivatives of the product, including translations and additional content regardless of the format. Any work that the licensee does to meet its market requirements is still based on the licensor’s original work and is “fruit of the same tree.” The licensee can have the rights to the translation as long as the contract is active, but once the contract has terminated, all rights, including the translated materials, should revert to the licensor.
If the licensor feels that there is value in the licensee’s adaptations in its own market, the agreement made between the two parties should allow the licensor to use any or all of the licensee’s derivative work in exchange for royalties back to the licensee or for a share of the revenue.
From a seller’s point of view, licensing products into a new territory extends the earning power of a product in which it has already made a substantial investment. Publishing has a high fixed but relatively low variable cost, and licensing is the optimal “variable,” because the revenue it generates is purely incremental. From a buyer’s point of view, licensing a product is an excellent way to take advantage of someone else’s capital risk in development. When compared to the publisher’s original investment in research, development, and production, the licensee’s additional costs to make the product appropriate for its market are minimal. Since royalties are paid only after working off initial advances and after actual sales are made, royalty expenses do not negatively impact cash flow.
With highly successful products, licensees may get to the point where they cringe at making high royalty payments, but they have to keep in mind the much smaller risk they took in the first place. And sending large royalty checks means that the bet on the original property is paying off. So, in reality, the higher the royalty checks, the happier both sides should be.
