Since late November, shares of The SCO Group (Nasdaq: SCOX) have lost about 80% of their value. The company's strategy of intellectual property (IP) litigation was certainly controversial, and hindsight provides some useful lessons for Foolish investors.
Any serious tech company's likely to sport a portfolio of IP, such as patents and copyrights. These holdings protect critical things like computer code, sophisticated designs, and even business methods. But IP rights are useless without enough resources to enforce them in court. As a result, tech companies spend considerable time and money retaining IP attorneys.
Yet some companies make money primarily by suing others they claim have violated their IP. Some call these operators "patent trolls."
SCO claimed it purchased the IP rights to the operating system software known as UNIX from The Santa Cruz Operation in May 2001. A couple of years later, SCO created its SCOsource business unit, pursuing aggressive litigation to get licensing fees for that IP. Some of the defendants include deep-pocketed companies like Novell (Nasdaq: NOVL), IBM (NYSE: IBM), and AutoZone (NYSE: AZO).
However, a couple weeks ago, a federal judge handed down a clear-cut decision on the matter. That is, Novell is the real owner of the IP rights. That was devastating to SCO's shareholders; the stock price plunged some 70% on that news.
In the tech world, technology is only one part of success. A company also needs to formulate a sustainable business model that includes understanding evolving customer needs and providing ongoing services. The many dead tech companies littering the sector testify to the difficulty of this process. But those that get things right -- such as Salesforce.com (NYSE: CRM) and VMware (NYSE: VMW) -- can offer investors particularly strong results.
SCO essentially attempted a costly, time-consuming "Hail Mary" to score a big payday. It might have better spent that time building products and getting customers. What's more, it picked fights with big-name tech players who know how to wage a court battle.
As of now, SCO's shares are trading at $0.51 apiece, and the company sports a market cap of a measly $11.5 million. It's definitely a sobering example. Foolish inventors looking at companies with similar strategies should realize that they're more like lotteries than businesses.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 2,509 out of more than 60,000 total participants in CAPS.
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