The system of paying royalties is a method of sharing the costs and sharing the profits of marketing something. Royalties are paid to property owners for minerals beneath their land, inventors, songwriters, musicians, and authors. A farmer who learns that there is oil on his land may not have the money to drill a well, pump the oil out of the ground, and ship it to market. An oil company will have the infrastructure to do these things. The farmer and the oil company will come to terms on a contract. If the farmer does not take a lump sum for the right to extract minerals from his land, he will receive a percentage of the revenue derived from the sale of the oil extracted from his land. This percentage of revenue or profit is called a royalty.
The same principal works for intellectual property, such as patents and copyrighted works of art. An inventor may not have the means to manufacture an invention. The author of a book may not have the means to have his or her book printed, or to make sure that reviews are printed in newspapers. The author or inventor makes a deal with the manufacturer or publisher to give them the rights to their intellectual property in exchange for a royalty, or percentage of future sales of a device or title.
Ensuring that royalties are paid accurately and in a timely manner has always been challenging. Much data must be collected, stored and updated. Simple spreadsheet programs are usually insufficient for the task, as different businesses have specialized types of data they need to use. If an oil company cannot accept a tank of oil from a property owner because it contains too high a concentration of paraffin, royalty calculations must be adjusted. Record labels must track not only sales of a recording, but also how often the recording is aired on radio stations or used in advertising. They all may need to track royalties to co-authors, agents and heirs. If advances are paid, royalties will need to be withheld until the amount of an advance is covered.
Specialized royalty accounting software can help mining companies, manufacturers and publishers deal with all of these variables. Some royalty accounting software is somewhat general, and can be configured for the type of business that pays royalties. Others are more specialized, so that an oil company will use different software than a record label. The degree of specialization depends on the scale of the business and the programming skills of a company’s IT department.