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

Greeting folks!

This note is written by Scott Sillcox in fall 2023 in response to a lot of readers asking me two questions:

A. You wrote and posted this 12 part blog in 2012-ish, is it still relevant today? Short answer - absolutely! The basics of sports licensing change very little over the years, so I strongly suggest that if you are trying to learn about sports licensing, read away! I have also tried to update certain areas where there have been significant changes, so I feel comfortable in telling you that this information is still highly relevant.

B. You mention that you are a consultant and might be able to help me, do you still do consulting? Short answer - absolutely. I work in the licensing field virtually every day of my life, so if you have questions or would like my help, contact me! The two primary ways I work are hourly telephone consulting ($175US/hour) and face-to-face meetings where I come right to your office for a full day ($1500US/day + $650 travel expenses).

Many thanks and happy reading -
Scott Sillcox

Please also 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.

================

Greetings!

This is Part 8 of a 12 Part Series of blogs Scott Sillcox wrote 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 (as of 2016, let's call it 14%). 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%.

September 2016 update: As you will see in the lists of royalty rates below, the 14% era is upon us.

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: 14% (changed from 11% as of 2015)
2. Royalty rate for sales to distributors: 17% (changed from 14% as of 2015)
3. Royalty rate for sales of products branded with MLB’s historic/heritage collection logo known as “The Cooperstown Collection”: 15%
4. Royalty rate for products jointly licensed by the MLB & MLBPA: 19%*
5. Royalty rate for sales of “Premium Products” (see Part 11 of this blog): TBA*
6. Royalty rate for sales of World Series products: 17%*
7. Royalty rate for sales of World Series products to distributors: 20%*
* 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: 13% (The great thing about an NBA license is it is really a joint NBA-NBPA license)
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. I would suggest that you look closely at what MLB is charging and you'll have a pretty good sense of where the NFL is likely to be.

This Sept 2016 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 18% (as of 2016).
- 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" - a remarkable effort that seems to cover royalty rate information for a massive variety of licensed products (not only sports). Please see this Amazon 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 $1000+ range (!!!), but I suppose worth it for a handful of world-wide licensed products companies.


PPS from fall 2023: In case you weren't aware, I created and constantly maintain a searchable Online Directory of 2500+ North American Licensed Sports Products Companies – it can be found at www.LicensedSports.net and only costs $59 to use for three full 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). There is nothing like it anywhere on the internet, and I update the database weekly, oftentimes daily.

Virtually all 2500+ company records have a contact name with title, phone number and email address. In many cases, I list up to six contacts within the company. What's more, many of the records have a Linkedin url so you can learn much more about that contact including if you know people in common.

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 for soft goods, check out this terrific and highly searchable resource at www. LicensedSports.net .


PPS from fall 2023: I am a very active consultant to people looking to learn more about the licensed sports product industry - you can find the full detail here.  I spend almost every day in the licensed sports product field and I work with between 300 and 500 clients each year. There are three primary ways I work with people:

1. Hourly telephone consulting
2. Full day face-to-face meetings where I will go almost anywhere in North America to spend a full day with you and giving you a fire hose amount of information that is directly applicable to your circumstances.
3. I have a bundled package of services for those people who know that they want to work with an existing licensee.

So visit here for more detailed info and let me know how I can help you move your idea forward.