Cyanogen -- the maker of CyanogenMod, a modified version of Android -- recently revealed that it rejected a buyout offer from Google (NASDAQ:GOOG) (NASDAQ:GOOGL) for around $1 billion.

CyanogenMod, a popular alternative OS for Android devices with unlocked bootloaders, is currently installed on as many as 12 million devices worldwide. Cyanogen has already collected $30 million over two rounds of funding, and is currently trying to secure a third round which could bump its valuation up to $1 billion. The company also secured deals with Micromax and OnePlus to manufacture Cyanogen-powered phones, and has lofty ambitions to become the world's third largest mobile OS.

CyanogenMod. Source: Cyanogen

Let's take a closer look at why Google wants to buy Cyanogen, and whether or not it was wise for Cyanogen to turn down that big offer.

Why Google is getting worried
Android is installed on 85% of the world's smartphones, according to IDC, but the OS is severely fragmented. Research firm Open Signal recently found that only 21% of all Android devices were updated to Android 4.4, the most recent version of the OS. This means that many of Google's new features, like Android Wear, won't be compatible with a large number of Android devices.

That's why Google launched its Android One initiative, which ensures that low-end Android devices, which meet certain hardware requirements, are always updated with the latest version of Android.

However, an increasing number of companies are "forking" Android and carving Google's services out of Android altogether. Amazon's (NASDAQ:AMZN) Fire OS, Xiaomi's MIUI, Alibaba's (NYSE:BABA) Yun OS, and other operating systems replace Google Play with their own marketplaces, which prevents Google from taking its 30% cut of app purchases. ABI Research estimates that 20% of all Android devices shipped worldwide between May and July were forked with an alternative OS. In 2011, Samsung (OTC:SSNLF) also launched its own app store on Android devices, pocketing the 30% cut of app sales for itself.

Amazon's Fire OS. Source: Amazon

Understanding AOSP vs. OHA
CyanogenMod isn't technically a forked version of Android, since most of its users still install Google Play and Google Services, but it's part of the same AOSP (Android Open Source Project) that encourages the modification of Android with less focus on Google Services. By contrast, Google's OHA (Open Handset Alliance) partners -- like HTC, LG, Asus, and Acer -- agree to include Google Services by default and follow guidelines in customizing Android.

Google is quick to pounce on partners who violate those terms. Google forced Acer to shut down its plans to launch Yun OS devices in China, and is reportedly interfering with the development Android-x86, the version of Android that runs on Intel-powered smartphones like the Asus Zenfone. Last November, Google kicked Cyanogen's CyanogenMod installer out of the Google Play Store, on grounds that it "encourages users to void their warranty."

These actions led to criticisms that Google is transforming Android, which it touted as an open source OS, into a closed source walled garden, similar to iOS and Windows Phone.

Declaring independence from Google isn't easy
Considering how quickly Cyanogen has grown, the next logical step would be to launch its own app store to generate a steady stream of revenue of its own, as Amazon, Xiaomi, and Samsung have done.

The possibility of Cyanogen evolving into a rival OS means makes it a lucrative takeover target for Google's rivals. That's why Microsoft (NASDAQ:MSFT), Samsung, Amazon, and even Yahoo were also reportedly interested in buying the company. That pressure likely convinced Google that it needed to buy Cyanogen and shut it down. Cyanogen was certainly bold to refuse Google, but it will face some major hurdles in its quest to become the third largest mobile OS in the world.

For example, Samsung -- which controls 25% of the world's smartphone market -- clearly wants to declare independence from Google. In addition to launching its own app store, it developed its own open source OS, Tizen, which currently powers most of its Gear smart watches. Samsung also developed a Tizen smartphone, the Samsung Z, but delayed the device's launch indefinitely in July due to a lack of developer support.

A Foolish final thought
However, Cyanogen isn't a hardware manufacturer like Samsung. Cyanogen simply needs to spread its modified version of Android from one hardware manufacturer to another.

XDA-Developers recently announced that CyanogenMod 11 can be installed on the three Android One devices that Google recently launched with its hardware partners in India. CyanogenMod is also installed on OnePlus' One, a Chinese phablet that nearly matches the specs of Samsung's Galaxy Note 4 at less than half the price.

If Cyanogen launches its own app store, it could become a serious threat to Google in India and China, two key markets which research firm Mediacells expects to purchase 500 million smartphones by the end of 2014. In my opinion, that could force Google to come back with a bigger offer in the near future.