12 Part Blog Description

Are you looking to learn as much as you can about the business of sports licensing? Then please read the 12 Part "An Insider's Guide to the World of Licensed Sports Products in 12 Parts: Practical Lessons from the Trenches" - all 12 parts of the blog can be found within this site. Click here to start with the Introduction.

Thursday, March 1, 2012

Part 8 - An Insider’s Guide to the World of Licensed Sports Products: Royalty Rates – Is 12% the norm and when 12% isn’t enough

Please note: This 12 part series initially appeared on my "Heritage Uniforms and Jerseys" blog, but I moved it in March 2012 to this blog which has a more single-focus on the world of licensed sports products. Thanks! Scott Sillcox

Greetings!

This is Part 8 of a 12 Part Series of blogs Scott Sillcox is writing called “An Insider’s Guide to the World of Licensed Sports Products in 12 Parts: Practical Lessons from the Trenches”. For a backgrounder on Scott Sillcox and his company, Maple Leaf Productions, please see the introductory blog and/or watch his 11 minute introductory video. Scott is available to consult with anyone interested in pursuing a sports license.

The 12 Parts of this Licensed Sports Products blog are:
Part 1: How Licensing Works - Follow The Money or How $5,000,000,000 can be less than you think
Part 2: What’s Involved in Getting a License – You need them far more than they need you
Part 3: The Landscape and some of the players
Part 4: Quality Control – Where The Real Power in Licensed Sports Lies
Part 5: Royalty Reporting and Audits
Part 6: Selling Licensed Goods - Why it’s not as easy as it looks
Part 7: Players Associations and Current vs. Retired Players
Part 8: Royalty Rates – Is 12% the norm and when 12% isn’t enough
Part 9: Local Licenses – myth or reality?
Part 10: Packaging
Part 11: Ten Things (Actually 12 Things) I Learned Along The Way
Part 12: Ten More Things (Actually 14 Things) I Learned Along The Way

Greetings!

As I was preparing my notes for this 12 Part series several months ago, I wrote the following little note to myself about this Part: “Nothing dark or sinister here, just a sharing of information”. And that’s really what this entire Blog is about, and in particular Part 8.

As I have said before, I am a big believer in perspective, so let’s put royalty rates in perspective. In the grand scheme of things all of the royalty rates charged by the various leagues/schools/organizations range from a low of 8% to perhaps a high of 20%, with the majority being in the 12% range. The good thing about royalty rates is that you know them in advance – there are no real surprises – and you simply have to factor the rates into your budget as a cost of doing business. In some cases the royalty expense is such that it may cause a product not to be produced, but the royalty itself is not surprising – you can count on it.

Allow me to clarify what “Royalty Rate” means in the context of licensed sports products: This is a payment made by the licensee to the license holder and it is calculated as a percentage of sales by the licensee to the “first level of distribution”.

For instance:

A. If Licensee Inc. sold $100,000 of NFL licensed product to Retailer Inc. and the appropriate NFL royalty rate was 12%, the licensee would owe the NFL $12,000 in royalties.

B. If Licensee Inc. sold $100,000 of NFL licensed product to Distributor Inc., and Distributor Inc. sold the same product to Retailer Inc. for $150,000, the royalty owed to the NFL would be on the first level of distribution (the $100,000 sale, not the $150,000 sale). Given that the NFL has a royalty rate of 15% for sales to Distributors, the licensee would owe the NFL $15,000 in royalties.


With that understanding of what Royalty Rates mean, let’s look at royalty rates on a league by league basis. But first, a couple quick provisos:

- If anyone reading this has additional or contradictory information, please share it with me and I will share this additional information (anonymously if you wish).

- Please understand that it is entirely possible that some licensees, especially the larger licensees, may pay a slightly lower royalty rate(s) than the ones I show below. I have never known this to be the case, but I nonetheless suspect it is the case. Again, if anyone has information they would like to share, it would be greatly appreciated.

- Royalty rates seem to have a tiny bit of what I what call “gradual creep”, meaning they seem to inch their way up every number of years - I don't know of any instances where the rates have gone down. but perhaps someone has a story they can share with us! But because of the creep, please don’t accept these rates as gospel for the rest of time – I’d bet 10 years from now the rates will be 1-2% higher across the board than they are now. For instance, when I became an NFL licensee in 2000, the rate was 10%. It is now 12%, and I suspect 10 years from now it will be 14%. (As an aside, the NFL first began a formal program of licensing in 1963 with a company "Sports Specialties" being the first licensee. The royalty rate at the time was 5%.)

MLB Royalty Rates:
1. Standard royalty rate for most sales/products/licensees: 11%
2. Royalty rate for sales to distributors: 14%
3. Royalty rate for sales of products branded with MLB’s historic/heritage collection logo known as “The Cooperstown Collection”: 12%
4. Royalty rate for products jointly licensed by the MLB & MLBPA: 17%*
5. Royalty rate for sales of “Premium Products” (see Part 11 of this blog): TBA*
6. Royalty rate for sales of World Series products: 14%*
7. Royalty rate for sales of World Series products to distributors: 17%*

* I would appreciate confirmation of this rate by others.

NBA Royalty Rates:
1. Standard royalty rate for most sales/products/licensees: 13%
2. Royalty rate for sales to distributors: 13%
3. Royalty rate for sales of products branded with the NBA’s historic/heritage collection logo known as “Hardwood Classics”: 13%
4. Royalty rate for products jointly licensed by the NBA & NBPA: 17%
5. Royalty rate for sales of “Premium Products” (see Part 11 of this blog): TBA*
6. Royalty rate for sales of NBA Finals products: TBA*
7. Royalty rate for sales of NBA Finals products to distributors: TBA*

* I would appreciate confirmation of this rate by others.

NHL Royalty Rates:
1. Standard royalty rate for most sales/products/licensees: 12%
2. Royalty rate for sales to distributors: 15%
3. Royalty rate for sales of products branded with the NHL’s historic/heritage collection logo known as “Vintage Hockey”: 12%
4. Royalty rate for products jointly licensed by the NHL & NHLPA: 18%*
5. Royalty rate for sales of “Premium Products” (see Part 11 of this blog): TBA*
6. Royalty rate for sales of Stanley Cup products: 15%
7. Royalty rate for sales of Stanley Cup products to distributors: 18%

* I would appreciate confirmation of this rate by others.

“NCAA” Royalty Rates:
[When I use the expression “NCAA” I really mean US College and Universities and not actually the NCAA itself. With that in mind, please also note that there are effectively four licensing bodies for NCAA schools/products: CLC, LRG, SMA and some schools themselves – see Blog Part 12 for a further description of the NCAA and each of these licensing bodies]
1. Standard royalty rate for most sales/products/licensees: 8-12% depending on the school
2. Royalty rate for sales to distributors: The licensing bodies tend not to have a distributor royalty rate, so the rate is the same general rate as #1 above, namely 8-12% depending on the school
3. Royalty rate for sales of products branded with the a historic/heritage collection logo known as “College Vault” in the case of CLC licensed schools and by other names in select other instances: + 2%, so 10-14%.
4. Royalty rate for products jointly licensed by the school & players association: There is no players’ association – the players are amateur athletes.
5. Royalty rate for sales of “Premium Products” (see Part 11 of this blog): The licensing bodies tend not to have a “Premium Product” royalty rate, so the rate is the same general rate as #1 above, namely 8-12% depending on the school
6. Royalty rate for sales of Championship Game/Finals products: There seems to be a trend towards charging a 2-3% premium above the general royalty rate as shown in #1 above, but this varies by school/league/licensing body so please ask the appropriate licensing body for the actual rate but generally 10-15% depending on the school.
7. Royalty rate for sales of Championship Game/Finals products to distributors: The licensing bodies tend not to have a distributor royalty rate, so the rate is the same general rate as #6 above.

* I would appreciate confirmation of this rate by others.

NFL Royalty Rates:
1. Standard royalty rate for most sales/products/licensees: *
2. Royalty rate for sales to distributors: *
3. Royalty rate for sales of products branded with the NFL’s historic/heritage collection logo: Not applicable. The NFL used to have a somewhat vibrant “Throwbacks Collection” set of licensees but it has lingered a bit and may only have one or two licensees currently involved. The NFL may be working on something new.
4. Royalty rate for products jointly licensed by the NFL & NFLPA: *
5. Royalty rate for sales of “Premium Products” (see Part 11 of this blog): *
6. Royalty rate for sales of Super Bowl products: *
7. Royalty rate for sales of Super Bowl products to distributors: *

* The NFL has asked me not to publish these rates - strange but true.

This chart shows the royalty rates for the MLB / NBA / NHL / "NCAA" / NFL

A few bit and pieces about royalty rates:

1. As you compare the various royalty rates, the “NCAA” stands out as somewhat of a bargain.

2. “Premium Products” will be explained in greater depth in Part 11 of this Blog, but:
A. A premium product is when a licensee sells licensed product to a league sponsor/supporter, typically for a giveaway. For instance, Sports Illustrated is a sponsor/supporter of the NFL, and when someone subscribes to SI, they are often offered a licensed premium item such as a team blanket or backpack. This is what is meant by a “Premium Product” and when the licensee sells that product to that company, the royalty paid is a “Premium Product” royalty.
B. IMPORTANT: Please note that any sales of Premium Products does NOT count against your annual guarantee! The sale of Premium Products is handled by a special Premium Product license and I will explain a bit more in Part 11 of this Blog.

3. The creation of products under the historic/heritage collection banner/royalty rate began roughly as follows:
MLB: Cooperstown Collection - began in 1988
NFL: NFL Throwbacks Collection – began in 1991
NHL: Heritage Collection – began in 1992; later changed the name to Vintage Hockey Collection.
NBA: Hardwood Classics – began in 1996
“NCAA”: CLC introduced the College Vault in 2009.

4. I mentioned above that a Super Bowl license is 15%.
- I didn’t mention that it is an extremely hard license to get. The NFL offers it to very few licensees – Hallmark is one very successful Super Bowl licensee with their entire Super Bowl party line of products.
- The NFL began a local Super Bowl license program recently where they award temporary Super Bowl licenses to a handful of companies (must be minority owned or woman-owned) who are in the local area where the Super Bowl is being held each year. They were five such licensees from North Texas for Super Bowl XLV. This is a bit of a PR initiative but also an incubator of sorts. The thought is that one or more of these licensees will go on to become a regular NFL licensee – the NFL doesn’t need more licensees, of course, there is a long line-up, but the public relations and local area interest makes for a good story.

5. As you might suspect the leagues tend to follow each other with respect to royalty rates. When the NFL created the “distributor royalty” rate in 2007, the NHL and MLB followed suit fairly quickly. What’s next you may ask – my guess, and that’s all it is, is that we are going to see a new royalty introduced for direct internet sales – many licensees sell products direct to the public via their own website or slightly veiled e-tail operations, and my guess is that the leagues will seize upon this as a means to introduce a royalty rate that is 4-7% higher than the regular royalty rate. And if one league does this, it’s a good bet the others will follow.

6. If you are a keen NFL fan, you may recall that the NFL had a sublicense called the “NFL Quarterback Club” that allowed licensees (especially video game licensees) to use a select group of current and retired quarterbacks and a handful of players from other positions. I don’t know for sure, but I believe this program ran from 1993-ish to 2002-ish, and my guess is that the royalty rate for this license was similar to the joint NFL-NFLPA license.

7. On the NCAA side of things, it appears as if CLC’s College Vault license (their historic/heritage collection license) is actually a separate license with a separate guarantee. For instance, if you have a University of Michigan license (through CLC) but you also want to produce a historically-themed product line and take advantage of some graphics/logos created by CLC/College Vault, then you have to sign an additional license agreement with a separate guarantee. This seems over the top and I hope this is one instance where the other leagues do not follow someone else’s lead.

One final thing before I sign off – this is a bit of a test for those of you who may be reading this entire blog. I recently heard a radio interview with a man who was explaining how he conducts job interviews – his system is dead simple and yet weeds out almost all the posers and pretenders and yields great results. All he does is pose a series of completely random hypothetical questions to the interviewee and asks them to think out loud as they try to answer each question. One question that stayed in my mind was “Assume that you are the sales manager for a company that sells bicycle tires in Toronto – how many bicycle tires could you realistically sell in one year?”

So for those of you who have been reading along, here goes your job interview question:
“You are the owner of an MLB team and you just heard a report at the Owners’ meeting saying that the standard royalty rate is being increased from 11% to 12%. How much additional revenue could you reasonably expect to receive over the course of a full year?”

The answer:
- Go back to Part 1 where we learned that approximately $5,000,000,000 (yes five billion) worth of MLB licensed merchandize is sold each year.
- Divide this figure in half to get the wholesale value = $2,500,000,000.
- We have just learned that the MLB standard royalty rate is 11% (not 12% as we used in the Part 1 example), so the $2.500,000,000 in wholesale sales will generate $275,000,000 of royalties.
- These royalties are divided equally among all 30 teams, so each team gets $9,166,000 of royalties each year.
- Let’s subtract the team’s “MLB Operations Fund” share [see Part 1 for details] of approximately $1,250,000 from the $9,166,000 and we see that each team gets $7,916,000 in royalties from the sale of merchandise each year.
- Now since the royalty rate has increased from 11% to 12% - an increase of 9% - the additional revenue my team could expect to get from this royalty rate increase is 9% x $7,916,000 = $712,000.
- So as an MLB team owner, when I learn at the Owners’ meeting that the royalty rate has increased 1%, after scratching a few figures on the back of an envelope I realize that I won’t get too excited and won’t give my GM the green light to sign a big time free agent with my $712,000 of newly found revenue.

Thanks for playing along and I hope you get the job!

That’s all for Part #8 of “An Insider’s Guide to the World of Licensed Sports Products: Royalty Rates – Is 12% the norm and when 12% isn’t enough

Thanks for reading and all comments are welcome!

Scott

PS In the "Who'd have thought it" category, I recently came across a book called "Licensing Royalty Rates 2009" - a remarkable effort that seems to cover royalty rate information for a massive variety of licensed products (not only sports). Please see this Google Books entry or search for the book name + authors Gregory J. Battersby + Charles W. Grimes. It's a bit pricier than your normal book - somewhere in the $750 range (!!!), but I suppose worth it for a handful of world-wide licensed products companies.

PPS In March 2012 I launched a new, searchable Online Directory of 1500+ North American Licensed Sports Products Companies – it can be found at www.LicensedSports.net and only costs $59 to use for three months. This is a highly searchable directory of licensed sports products companies in North America, companies that have been licensed by various sports leagues (NFL, MLB, NBA, NHL, NCAA, Nascar, MLS, etc.) as well as the various players’ associations (NFLPA, MLBPA, NBAP, NHLPA) and there is nothing like it anywhere on the internet. If you're not sure if this database would be worth the investment, check out this 3 minute video that gives you a sense of what to expect.

So if you’re looking for all the licensed sports products companies based in Connecticut, or all of the NFL licensees which sell housewares, or all companies licensed by the NBA and the NHL and MLB, check out this terrific and highly searchable resource at www. LicensedSports.net .

You might be asking yourself why did Scott Sillcox spend so much time and effort to create this Online Directory?

The answer is simple. I have a fair amount of knowledge about the licensed sports products business, knowledge that seems to be in scarce supply, especially on the internet. After spending 15+ years in the licensed sports products business, I accumulated a wealth of knowledge that I am happy to share. This blog and modestly-priced Online Directory are designed to share that information - information that is simply not available anywhere else on the internet. This blog and Online Directory are my way of giving back and helping people interested in the world of licensed sports products. I am also available as a consultant to people wanting to enter the licensed sports business (either by obtaining their own license or working with an existing licensee) as well as to existing licensees and would be delighted to chat with you if you think I might be able to help you in some way.

PPPS: This is just a quick FYI that in Q1 2015 Scott Sillcox will be continuing the multi-city tour of North America that he started in the spring of 2013. While in each city, Scott will be meeting with people who want to learn more about sports product licensing.

If you are considering going through the process of acquiring a sports license(s), or if you are considering working with an existing licensee, you should strongly consider meeting with Scott as he criss-crosses North America.

There are three different types of meetings being offered:

1. You can meet with Scott for a full day session – from 8:30am – 5:00pm - just you and Scott (or you and your team if you wish). The full day one-on-one session fee is $1500.

2. You can meet with Scott for a half day session (4.5 hours) – either in the morning or the afternoon. This half-day session is also one-on-one - just you (or your team) and Scott. The half day session fee is $900.

3. You can meet with Scott in a day long workshop attended by no more than 5 people like yourself. 8:30am – 5:00pm. Truly great things come from workshop sessions like this – you meet and learn from kindred spirits because everyone brings a little something to the table. As long as you are willing to share a little bit about your idea, a small group workshop like this is a great learning tool and you will leave highly energized and highly motivated. The group workshop fee is $499 per person, and if a second person wants to attend from the same organization, the fee for the second person is $250.

One of the more popular parts of Scott's tour will be the 3rd option mentioned above - the one-day workshops in each city where there will be no more than 5 participants.

The focus of these workshops will be twofold:

- Understanding in detail what is involved in trying to obtain your own license(s)
and
- Understanding the ways in which someone with an idea for a licensed sports product might be able to work with an existing licensee to see the product come to life. We will discuss the pros and cons, as well as the hurdles you will face.

If you are interested in sports licensing but have a lot of questions, this day long workshop is a great source of information - and at $499, it's a terrific value. Workshops must be booked 10 days before the workshop date.

The cities and dates for the Q1 2015 tour are:

Dates / City
1. Jan 12-15 (Mon – Thurs): Las Vegas
Sports Licensing & Tailgate Show is Jan 14-16
2. Feb 3 – 5 (Tues – Thurs): Chicago
3. Feb 10 – 12 (Tues – Thurs): Boston
4. Feb 17 – 19 (Tues – Thurs): Los Angeles
5. Feb 24 – 26 (Tues – Thurs): Princeton NJ & NYC area
6. March 3 – 5 (Tues – Thurs): Cleveland & Ohio
7. March 10 – 12 (Tues – Thurs): Fort Lauderdale, FL
8. March 17 – 19 (Tues – Thurs): Dallas
9. March 24 – 26 (Tues – Thurs): Washington DC

You may have been dreaming about your product and the opportunity it represents for months, maybe years – now’s the time to move your idea forward! Take advantage of Scott being in your own backyard, roll up your sleeves and sign up to meet with Scott in person.

To register, simply call Scott at 416-315-4736 or email him at ssillcox@rogers.com and book your face-to-face time - you can lock-in a confirmed session right over the phone.

If you would like to see a proposed agenda for any of the three different session structures, just ask Scott and he will email you a proposed agenda.

12 comments:

  1. How is the royalty rate determined for a particular school? For instance, according to the CLC website, BYU is only 9% while the vast majority of schools are at 12%.

    ReplyDelete
    Replies
    1. HI Jason -

      Thanks for the question. In the case of CLC schools, it comes down to whatever the school and CLC jointly decide. Ditto LRG schools, and ditto SMA schools. For independent schools, they will make the decision themselves.

      By the way, I don't think you're right when you say most CLC schools are 12% - my experience is that most schools are in the 10% range. Just go to http://www.clc.com/Clients.aspx and choose the school and you will see their rate - I think you'll find 10% is the norm.

      All the best and thanks for reading!
      Scott

      Delete
    2. Thanks for the link and the response. You are right that most are at 10%. A few at 12%. Duke is at 15%!

      So is the school itself getting paid based on the the royalty percentage or is that what CLC is taking as a fee for managing the marks? I guess if a school wanted a bigger "branding" presence it might desire a lower royalty if CLC will cooperate. Am I on the right track in understanding this?

      Delete
  2. This comment has been removed by the author.

    ReplyDelete
  3. Hello Scott, I'm based in Paris (France).
    Thank you for allowing us to better understand the world of licensed sports products.

    In the chart showing the royalty rates for the MLB / NBA / NHL / "NCAA"
    I'd like to understand why there is sometime a difference between
    1. Standard royalty rate for most sales/products/licensees and 2. Royalty rate for sales to distributors?
    Thank you
    Enrick

    ReplyDelete
    Replies
    1. Hi Enrick:

      Many thanks for your note and question.

      To answer tis question, you need to make sure you understand what a distributor is. In the sports licensing world, they are a "middle man" who buys from the licensee, stores the product in their own warehouse, then sells the product to small independent retailers.

      Let's use an example. Let's say a licensee sells their product at a Tier 1 price of $10 to small independent retailers. That same licensee sells that same product at a Tier 2 price of $9 and a Tier 3 price of $8.

      The distributor buys at the Tier 3 price of $8, and when they re-sell it they sell it for $11.

      Several of the leagues have decided that they are losing royalty revenue when a licensee sells to distributors, thus several leagues have decided to raise the royalty rate on sales to distributors to make up the "shortfall".

      For instance:
      - The licensee sells 20 products to a small independent retailers at a Tier 1 price of $10. The 12% league royalty is therefore $24.
      - The license sells 20 products to a distributor at a Tier 3 price of $8. The 12% league royalty would be $19.20. But if the league raises the distributor royalty rate to 15%, they would collect $24.

      I hope this makes sense to you!

      Scott

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  4. Hi Scott,

    I just discovered your blog - really great! With the recent news of Nike spending $100 million to sponsor Manchester United, do you have any insight into what royalty Nike may be paying in a deal like that? Would the size and scope of a Nike deal like this (providing the kit, advertising, retail operations, etc. afford them a royalty less than what what is typical?

    ReplyDelete
    Replies
    1. ...that's $100 million/year for 10 years!

      Delete
    2. Hi -

      Thanks for your great note and I don't have all the answers, but my speculation would be:

      - This is a joint sponsorship AND licensing deal in one

      - Most EPL and European soccer team sponsorships are generally primarily sponsorship deals, but this is different than most because Nike can play a dual role as sponsor and licensee.

      - Built into this $100 million/year sponsorship deal would be licensing rights for Nike to produce all sorts of apparel and accessory items. My guess, and it's only a guess, is that with the guarantee of $100 million/year x 10 years (it's likely staggered but for simplicity's sake let's assume it's an equal payment each year x 10 years), Nike's sale of licensed merchandise is not subject to a royalty payment to the team - the royalty is built into the sponsorship deal. But that's just a guess on my part.

      - If the royalty isn't built-into the deal, then my second guess would be that instead of a usual royalty of 12% of wholesale sales, Nike might be paying Man U 8% - whatever the figure might be, I would guess it's a reduction.

      - Since Man U is a publicly traded company, we'll certainly be able to find out the answer in Year 2 of their agreement, ie after they post their financials for the first year of their new 10 year sponsorship agreement.

      Thanks for reading and asking -
      Scott

      Delete
  5. Hi Scott-

    Is this just for the organization? Do individual players get a royalty on top? Any idea what NASCAR and its drivers command for a royalty?

    Thanks!

    ReplyDelete

Thank you for taking the time to add a comment - all input is welcome, especially the constructive kind! All the best - Scott