Royalty Rates: Why a Video Game Licenses at ~45% and Business Software at ~15%

Back before the full-scale war, a Ukrainian developer of a video game with worldwide sales approached us. The task: raising investment to complete and promote the game's second instalment. The investor needed the value of the company's principal asset — its intellectual property: the game itself, its universe, its brand. The calculation featured a royalty rate approaching 45% — and to anyone from "ordinary" business, such a figure raises a legitimate question: why nearly half of revenue? After all, business software licenses at a fraction of that — around 15%.

The answer to that question is a short course in how intellectual property is valued at all.

The relief-from-royalty method

The easiest way to grasp the value of an intangible asset is through a question: how much would you have to pay for the right to use this asset if you did not own it? That is how the relief-from-royalty method works — one of the principal methods of the income approach in intellectual property valuation, recognised across IVS-based practice worldwide.

The logic is transparent. The asset's owner is "relieved" of the licence payments they would otherwise make for someone else's creation. That saving is a real cash flow generated by the asset. Take the revenue forecast, apply a market royalty rate, discount — and you have the value. All fair, except for one delicate point: which rate to take? That is where the fate of the final figure is decided, and that is why the royalty rate is the most scrutinised element of such a report.

Why a game commands 45% and accounting software 15%

The spread of rates across industries is not a statistical whim. It reflects how much of a product's value is created by the intellectual property itself.

In a video game, the IP is practically everything. The content, the story, the characters, the universe, the recognisable name — that is what the player pays for. The marginal cost of a copy in digital distribution tends towards zero: selling a million copies costs little more than selling a thousand. A licensee receives a finished product that only needs selling — and is therefore willing to hand the rights holder a substantial share of revenue, up to around 45%.

Business software is built differently. The program is only part of the value: the client also pays for implementation, configuration to its processes, support and infrastructure. A significant share of revenue is earned by the licensee's own labour — service and maintenance — so the rights holder's share is more modest, around 15%. The more "service" and the less "pure IP" in a product, the lower the rate. The rule holds across the entire spectrum of intangibles — from trade marks to patents.

Where the figures themselves come from

The question clients ask most often: where do you get the rates? In Ukraine there is no public statistics on licensing transactions — the market is opaque. The work therefore rests on international subscription databases that have accumulated thousands of real licence agreements, organised by industry and product group.

The discipline is strict. A rate is selected only within its own product group: games are compared with games, industrial technologies with industrial technologies. On geography, the valuer takes either a multi-market average or the market most similar to the one at hand. Country-by-country detail is needed only when the purpose of the valuation is an actual licence agreement with a specific jurisdiction; for establishing an asset's value, a properly substantiated market range is sufficient. The report preserves the audit trail of every figure — source, sample, transaction selection criteria — so that an investor, an auditor or, if it comes to that, a court can retrace the calculation.

The rate is a computational tool, not a recommendation

And the main thing to keep in mind when reading a valuation report. The royalty rate in it is not advice to "license your product at these percentages". It is a computational tool: a market benchmark through which the asset's cash flow is converted into value. An actual licence agreement is a matter of negotiation, and its terms may deviate from the market average in either direction.

For the game developer, that valuation became an argument in conversations with investors: the value of the IP stopped being a matter of faith and became a matter of calculation. The same approach works for any digital asset anywhere in the world — from a game universe to a corporate system: since intangibles are valued to international standards from documents and data, we perform this work for clients in any country. A website and software valuation is built on the same methods and the same databases as the valuation of global brands' IP. The only difference is the rate — and now you know where it comes from.