Royalty Free: What does it mean for SMBs?

Knowledge intensive industries are very much dependent on the proper use of Intellectual Property (IP) and other forms of knowledge intensive assets. The ICT industry in general and the software industry in particular provides an excellent example for this: It’s very common for software development enterprises to take advantage of software libraries developed by third-parties in order to implement, deploy and provide their product and services. In this context, the terms and preconditions needed to access and use third-party knowledge become very important for the competitiveness of enterprises.

In several cases companies license third-party IP and other forms of knowledge at a fee. This is for example the case of manufacturers that pay fees in order to access reference implementation of the standards that they use in their products. This is one of the reasons why a product’s standardization and/or certification can be a quite expensive process.  Nevertheless, in other cases they are also provided with a very compelling and cost-effective alternative: Royalty Free (RF) licensing. The Royalty Free option to accessing and using knowledge involves use of some knowledge asset without paying any royalties or licensing fee.

Understanding the basics of Royalty Free Licensing

A Royalty refers to the amount of money that a party pays to the owner of a knowledge asset, for the purpose of using this asset. Specifically, a licensee pays a royalty to the owner in order to gain the right of using this asset for a specified period. The monetary value of a royalty fee varies, as it can be determined based on several different practices. For instance, it common for a royalty fee to be calculated as a percentage of the revenues derived from the sales of the product or service which makes use of the asset that is associated with the fee. Likewise, royalty agreements can in several cases include a royalty interest, defined as the right to collect a set of future royalty related payments. The specification of a royalty fee is usually part of a licensing agreement, which details the terms that regulate the licensing of a resource. Licensing agreements may specify limitations associated with market segments, geographic areas, product types and more.

Royalty free agreements waive the royalty fee and do not include the typical “per item sold” or “per volume sold” payment. As a prominent example, software and telecoms vendors can adopt open royalty free standards, which they can access and use without paying a standardization body. For this reason, open standards are considered as a key to boosting adoption of new technologies, along with their fast incorporation in enterprise products and services.

There are also cases where royalty free agreements imply the payment of a one-time fee in exchange for the right to use some protected resource i.e. some work protected by a copyright, patent, or trademark. In such cases, a fee is initially paid, but there are no ongoing and recurring license fees for further use of the asset.

Note that royalty free does not mean copyright free. An owner of a resource may opt to render it accessible on a free basis yet retaining the copyright or other form of protection over the resource. As a characteristic example, open source software is commonly provided on a royalty free basis. However, this does not mean that the author of the software defuses his/her right on the software. Users of royalty free assets are usually expected to acknowledge and/or credit the creator of the asset in order to use it for free. Relevant provisions are made in the scope of the licensing agreement (e.g., the public copyright license) that accompanies the asset. For instance, many royalty free assets come with the Creative Commons (CC) popular copyright license. The latter is the most common type of non-exclusive public license and has the characteristic that is can never be revoked by the creator. CC specifies the following conditions:

• Attribution, i.e. the use of a CC asset only when giving proper credit to the creator of the asset. In practice, what is specifically meant by “proper credit” is defined by the creator.
• Share-Alike i.e. the use of a CC asset under the condition that your product is released based a similar license to the one of the assets used.
• Non-Commercial, i.e. the use of a CC asset only for completely non-commercial purposes.
• No Derivative Works, i.e. the use of the asset only when the original work in not modified at all.

These four attributes of the property can be combined: For instance, it’s possible to release an asset with a CC Attribution and Non-Commercial license, which means that the creator of the asset should get proper credit while the derivative work shall not generate commercial revenue.

Royalty Free Assets and SMBs

Royalty free knowledge assets facilitate the rapid sharing of knowledge and boost enterprises’ ability to develop innovative products and services. Their value is particularly important for Small Medium Businesses (SMBs), which lack in most cases the equity capital needed to license expensive proprietary assets. In particular, royalty free assets provide the following benefits to SMBs:

• Cost effective access to software packages: Most SMBs rely on software assets and packages for their operations. For example, the majority of small enterprises operate a set of enterprise applications such as Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) systems. ERP and CRM costs can be significant and recurring. In this context, royalty free software packages can help SMBs fulfill their enterprise application needs at a very low cost, based on the use of open source, royalty free software.
• Flexible on-demand access to media assets and other forms of content: In the era of content-based marketing and internet marketing, even small companies need to produce and provide to their prospective customers visually appealing content. The latter includes blog posts, white papers and brochures that include visuals, and infographics, while using web site templates, document layouts and more. The latter resources (e.g., templates for white papers and infographics) can in several cases be licensed as royalty free content (e.g., royalty free templates or icons), instead of being purchased. This provides SMBs with the ability to create rich content with relatively small budgets.
• Rapid Impact Creation: There are many examples of SMBs that provided their creations on a royalty free basis as a means of accelerating their adoption by the community. Such examples can be found in the software and gaming industries. By releasing assets without royalties, SMBs can rapidly create a critical mass of users around their products and services, which can latter help them support other business models such as advertising or the provision of value-added consulting services. Therefore, royalty free assets can provide benefits not only for licensees, but for the asset creators as well.

In the era of technology acceleration and the rapid growth of the internet, the wave of royalty free assets and resources is likely to grow. SMBs should therefore seek the best ways to benefit from it, either from the creator’s or from the end-user’s perspective. To this end, they had better start their quest for a solution with a question: Is there a royalty free option?