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ROYALTIES
One of the main benefits of patents is royalties. Although royalties are strictly optional, most companies are willing to purchase royalty-bearing licenses from patent owners. There is no minimal or set financial amount for royalties; the patent-owner and the licensee agree upon the amount.
Probably the best-known case of royalties is “the chess case”. As the legend goes, the inventor of chess was presenting his creation to the ruler. The ruler was amazed. He offered to grant anything the inventor would ask for. The clever inventor simply said that all he wants is grain, the amount of which would be found the following way: One grain are placed on one square of the chessboard; 2 grains are placed on the second square, 4 on the third, and the numbers double until all of the squares are filled. The ruler was relieved that the inventor did not request money and gladly agreed. A couple of days passed and one of the advisors came to the ruler with bad news. He said that the amount the inventor requested is larger than the amount of grain in the whole world (264)!
Since there is a direct expense to the licensee, there is a doubling effect that helps the patent owner be more competitive in the market. For example, company ABC patented the technology for the production of golf clubs. Company XYZ also wants to enter this market, so it purchases the royalty-bearing license from company ABC, with a negotiated $2 per golf club royalty. Now, company ABC receives $2 from every golf club that XYZ sells, XYZ's golf clubs are also more expensive due to the royalty and the company is quickly forced out of the market. ABC dominance continues until another company patents a cheaper, more efficient or a principally different.
Royalty income can be substantial when a patent is in an area in which it is required by competitors. The best example is the computer industry where Texas Instruments holds basic technology patents on memory chips. When, in 1987, Texas Instruments raised its royalties on memory chips, companies such as NEC, Matshushita, Fujitsu and Mitsubishi refused to pay. These companies were charged with patent infringement resulting in the acceptance of the royalties and a fine of $281 million paid to Texas Instruments over the course of two years.
