A royalty is a payment made to the rights holder for the permission to use their property — this is usually the creator of the artwork.
An artist may negotiate this payment themselves with the producing company, or royalties may be negotiated through the Professional Associations and Unions they belong to. Professional Associations and Unions may also set standards for what the royalty rate may be.
For scripts, it is usually a negotiated percentage of the box office revenue. For plays it is generally in the 8-10% range, almost always 10% for world premieres. For musicals it could be up to 12%. For musicals, this percentage lands closer to 12% if you are doing a national (or world) premier, iif you the playwright and/or composer are involved in the production, or if you are licensing a property that was recently (within the last 5 years) on Broadway or the West End.
A term that is often used when describing the payment owing to a rights holder is “Advance Against Royalties”. Advance Against Royalties is a negotiated amount that is paid to the rights holder in advance of the royalty payment, usually at signing of the contract. It is a guaranteed amount, meaning that even if the total sum theoretically earned from the royalty is less than what is negotiated for the advance, it doesn’t get reimbursed. For example:
You have negotiated a 10% royalty with a playwright, with a guaranteed advance against royalties of $5,000. That $5,000 can either be paid as a lump sum on signing, or split in some manner…maybe $2,500 on signing and $2,500 on the first day of rehearsal. At the end of the production 10% of the total box office revenue is $10,000. Since you have already paid $5,000 to the playwright, you would only owe an additional $5,000, giving a total of $10,000. If on the other hand 10% of the box office is only $4,000, you do not get reimbursed $1,000. The playwright gets to keep the full $5,000, even though in this scenario 10% of the box office revenue is only $4,000.
Royalties are paid to the person or organization that manages the rights of that particular property (script, music, image, etc). In the simplest scenario, you are negotiating directly with a single playwright, and the payment goes to that person. Often the playwright is represented by an agent; in that case, the payment would either go to the playwright or to the agency – the details of which would have to be specified in the contract. It can get more complicated if there are multiple creators involved, as is often the case with using previously recorded music (but more on that later).
Information for rights holders
There is some basic information that all rights holders will need to know. As a rights holder, you may be entitled to royalties when your work is shared. When trying to figure out an appropriate advance to ask for, a number of factors will come into play, especially those that will impact the gross box office potential.
- Dates of the performance
- This is important because they will want to know if there are any conflicts with any other productions.
- The time of the year can also have a big impact on ticket sales so the rights holder will want to know if the production is happening over a holiday, during the dark days of winter, the heat of the summer, etc.
- Number of performances
- The more performances, the higher the revenue potential.
- This is also a key factor if you are ever in competition with another producer to secure the rights. If one producer is willing to put on more performances than another, that will influence the decision on who gets to produce the show.
- Venue
- Larger venues have a greater box office potential than smaller venues…unless you decide you only want to sell a portion of the venue. For example, you may decide that you don’t want to sell any tickets in the balcony for the run of the show, thereby reducing the box office potential for the production. This is different than deciding that you don’t want to open up the balcony until a certain percentage of the orchestra level has been sold. In that scenario you are just impacting the timing of the sales, not the overall potential.
- The venue is also important information as the rights holder may want to know EXACTLY where you are putting on their show. A larger city may have more potential than a smaller city, a downtown area may have more potential than in the suburbs, etc. While those assumptions may not be accurate for your production, they are fair questions to ask and it is up to you to explain your particular situation.
- Ticket prices
- The higher the ticket prices, the higher the box office potential. Fairly straight forward. But the level of detail they may request can vary from just the overall ticket range ($25 - $80), to the overall ticket average, to a full ticket breakdown.
- They may also want to know if you are selling subscription or group sales discounts. While discounts mean less revenue, subscriptions and group sales generally result in an increase in ticket sales.
The level of detail that a rights holder will ask you to provide usually varies depending on the type of production you are putting on. For example, if you are producing a community theatre production (nobody is being paid), they will most likely want some basic details but won’t need too much, as they may not even charge a royalty. It’s possible they may only charge you a straight fee per performance. If you are putting on a professional production, either as an independent producer or as part of a venued theatre company, it is normal for them to ask for more detail but they don’t generally ask for a full breakdown of everything. For commercial theatre productions, they may want to know everything with full breakdowns of sales plans to marketing budgets.
When securing the rights to music, it is fairly common for Publishing and Master rights holders to want to know what you are paying for other similar rights to make sure that they aren’t getting paid less than the others and are very upfront about that. They may also ask you what your budget is for your music budget, or your overall production budget.Something to note is the difference between two terms: Gross Box Office Potential and Net Box Office Potential. At the most basic level, the difference between them is tax. Gross includes all the money collected while Net removes the tax. Naturally, it can be more complicated than that. Some industries allow for further deductions from the Gross, such as facility fees, service charges, commissions, and even ticket printing costs. It’s important to know what is allowable in your situation.
Distinguishing whether the royalties are a percentage of your Gross or Net Box Office Potential is very important as it can be a rather large difference in the bottom line. In most situations you can base the percentage on the Net Box Office Potential (Gross, minus the taxes) but often you can also deduct facility fees and service charges as that is money that the Producer never sees. It goes straight to the venue and ticketing company. But it is all a negotiation.
Negotiating, timelines, and contracts
Keep in mind that royalties related to all rights discussed so far are negotiable, from percentages paid to advance – with the exception of anything that is specified in a collective bargaining agreement, such as royalties stated in the Playwrights Guild of Canada world premiere contract – but even that is technically negotiable during the collective bargaining negotiations between the Professional Association of Canadian Theatres (PACT) and the Playwrights' Guild of Canada (PGC). If you feel strongly about anything in those agreements, get involved. Talk to PACT. Share your thoughts. Get on one of their committees. Get involved early so you have time to be heard.
Speaking of timelines, everything with regards to rights takes time. And sometimes a LOT of time. So make sure you give yourself plenty of time to find who manages the rights and to negotiate the deal. That being said, time is often a luxury, especially if music decisions are not decided until in the rehearsal hall. As a result, you need to make sure your director and music designer know that if they don’t figure out their music requirements ahead of the rehearsal process, there may not be enough time to secure the rights to use them. And even then, there is never a guarantee. In other words, plan as much as you can, as early as you can!
Lastly, make sure everything is written clearly in a contract, and review the contract periodically. You definitely do not want to undo all the work you have done because something in the contract was inadvertently missed.
All this will put you in a situation to succeed, and ensure that all the artists whose work make up your show are being credited and paid appropriately.