What are Residuals?

the queen of residuals
photo:angela george (modified)

Dear Rich: As I understand it, trademarks, patents, copyrights, and trade secrets are different types of intellectual property assets and each can be licensed at a fixed rate or percentage. Is this correct? And to clarify, are residuals a form of contractual payment where a studio, music producer, publisher, TV Producer, etc. will pay for the use of a 3rd party IP license at a fixed rate or percentage? 

You're correct that intellectual property can be licensed. But the royalty rate is generally not fixed. There are a few IP assets where the royalty rate is fixed by law, for example, licensing rights to perform a cover version of a song. A licensor (the owner of the asset) is usually offered a rate within a narrow range, based on what the market will bear. For example, fabric designers typically earn about 5% of the wholesale price per yard of fabric sold. 

Residuals v. royalties. Residuals and royalties have a few things in common and the terms are sometimes used interchangeably. They're both periodic payments for the right to exploit something, and they're both based on formulas that are calculated for a period. Royalties are paid for the licensing or sale of things -- writings, art, music, inventions, designs. Residuals are paid for entertainment services -- for example, acting in, or directing a TV show. Residuals (as the term implies) are typically paid after the project has earned back its initial expenses. Royalties are typically calculated as soon as the product is on the market. 

For info on patent and trade secret licensing check out our book, Profit From Your Idea. For the lowdown on copyright and trademark licensing, check out our book, Getting Permission.