Last year, Cyanogen CEO Kirt McMaster told Forbes that his company's forked version of Android would put "a bullet through Google's head." At the time, McMaster believed that Cyanogen's "Google-free" version of Android, CyanogenMod, would be popular with companies that wanted to install Android but didn't want to be tethered to Google's Play Store, Search ecosystem, and other user-tracking features.
Some companies liked Cyanogen's vision. Leading Latin American smartphone brand Blu, Chinese smartphone maker OnePlus, and top Indian smartphone maker Micromax all launched Cyanogen-powered devices. To compensate for its lack of Google apps, Cyanogen signed a "strategic partnership" with Microsoft (NASDAQ:MSFT) to integrate services like Bing, Skype, OneDrive, Outlook, Office, and Cortana into the OS. Some users installed Amazon's (NASDAQ:AMZN) App Store as a replacement for Google Play.
Unfortunately, Cyanogen's strategy seems to be running out of steam. Android Police recently reported that the start-up has laid off about 30 people, or 20% of its total workforce, with most of the cuts coming from the division that updates the CyanogenMod ROM. Does this mean that Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) would-be assassin has run out of bullets?
The business of forked Android
Google developed Android as an open-source mobile OS. But since Google's business is based on mining data for targeted ads, Android eventually became a way to tether mobile users to Google services like Search, Maps, and the Play Store. Some OEMs and developers criticized Google for turning an "open source" OS into a "closed source" walled garden like iOS.
In response, those OEMs and developers formed the AOSP (Android Open Source Project), a community that promotes the development of Android without integrated Google services. This practice of stripping out Google services was known as "forking", and two forked versions of Android became the most prominent -- Amazon's FireOS and CyanogenMod. Many Chinese OEMs, which were already blocked off from Google services, also built first-party ecosystems on top of forked Android.
What went wrong with Cyanogen
Cyanogen has attracted a lot of major investors, including Foxconn, Qualcomm, Twitter, and Tencent. It even rejected a $1 billion buyout offer from Google in late 2014, which was presumably aimed at shutting down the growing OS. After raising $110 million in its most recent round of funding last year, Cyanogen was valued at nearly $1 billion. Last August, it claimed to have over 50 million users worldwide.
But here's the problem -- it never figured out how to monetize those users. Cyanogen initially generated a small, undisclosed amount of revenue from selling themes for customizing its OS, but they were ironically sold through Google Play, which retained a 30% cut of the sales. This meant that CyanogenMod users had to install Google services -- which some were intentionally avoiding -- to provide the company with any revenue. It then mulled the development of its own Android app store, but those plans never panned out. It presumably generates some revenue through its partnerships with OEMs and Microsoft, but no one except Cyanogen and its investors know how much those deals bring in.
In late 2014, Cyanogen lost its partnership with OnePlus after it signed an exclusive deal in India with its rival Micromax. That moved raised concerns about partnering with Cyanogen, which seemed willing to sign exclusive rights over to dominant players in large markets without notifying existing partners. Microsoft's partnership with Cyanogen also wasn't an exclusive one -- the tech giant offered the same pre-installed apps deal to other OEMs like Samsung, the largest Android OEM in the world.
Android Police initially reported that Cyanogen would halt the development of CyanogenMod and "pivot" toward app development instead. McMaster countered those claims on Twitter, stating that the company wasn't pivoting toward apps, and that its "mission of creating an open Android stands." However, McMaster didn't address the layoffs or the company's long-term challenges.
McMaster is no stranger to controversy. His attempt to turn an open-source version of Android into a for-profit business was controversial among developers. Generating revenue from a Google-developed product by stripping out Google services was also criticized as "biting the hand that feeds it," and McMaster's comments about putting bullets through Google's head were widely ridiculed.
The wannabe that didn't get to be
I think Cyanogen is a textbook example of a start-up which didn't properly map out its second act. It ignored the fact that most Android users depend heavily on Google services and probably wouldn't be inclined to buy Android phones which were intentionally detached from that ecosystem.
It didn't recognize that gathering an army of also-rans, as Microsoft has done in the mobile race, isn't a viable way to create a cohesive mobile ecosystem on par with Google's. Lastly, it didn't realize that its OEM partners, which desperately needed to stand out in a crowded market, wouldn't appreciate Cyanogen offering its OS to rival device makers.
CyanogenMod will likely continue to appeal to a niche group of smaller OEMs and Android tinkerers, but the company's strategy of building a full-fledged business on top of that OS doesn't seem to have a bright future.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon.com and Qualcomm. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Qualcomm, and Twitter. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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