Royalties are legally binding payments to intellectual property owners for the rights to use intellectual property (IP) such as copyrights, patents, and trademarks.
Royalties stem from licensing, which is the process of one entity permitting another entity to have, produce, or use intellectual property that they own. Royalty payments from licensing help protect intellectual property users from claims of improper use by the owner. In most licensing agreements, royalty rates are paid as a percentage of sales or units sold. Factors affecting royalty rates include the exclusivity of rights, available alternatives, risks involved, and market demand.
Additionally, intellectual property owners may choose to sell their product to a third party in exchange for royalties from the future revenues the product may generate. For example, computer manufacturers pay Microsoft Corporation royalties for the right to use its Windows operating system in the computers they manufacture.
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