Cyanogen CEO Kirk McMaster has recently made a lot of bold statements. Shortly after telling Business Insider that Samsung (NASDAQOTH:SSNLF) would be "slaughtered" within five years, McMaster told Forbes that his company was "putting a bullet through Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) head."
Do McMaster's boastful claims have merit, or are they unjustified statements intended to generate hype for his company?
How Cyanogen makes money
Cyanogen's only product is CyanogenMod, an open-source mobile OS based on Android. Since the OS is free, the company only generates revenue by selling "themes" for customizing phones. Cyanogen has never disclosed exact revenue figures, but a Forbes article says that the amount is "minimal". Cyanogen sells these themes through Google Play, which ironically gives Google a 30% cut of sales, although the company plans to eventually launch its own app store.
If Cyanogen can launch its own app store, it could possibly establish its own revenue-generating ecosystem. However, establishing a new mobile OS in today's iOS/Android duopoly has proven to be tough for much better funded companies.
For example, Samsung launched Tizen, its own OS, over three years ago, but its app store is still tiny. It also launched its own app store on Galaxy devices to establish its own Android ecosystem, but it's still much smaller than Google Play. Amazon (NASDAQ:AMZN) successfully established its own Android-based ecosystem of nearly 300,000 apps, but it only did so by aggressively marketing its Kindle tablets to its massive e-commerce user base.
How Cyanogen could hurt Google
Cyanogen recently secured partnerships with Blu, one of the top smartphone brands in Latin America, rising Chinese smartphone maker OnePlus, and top Indian smartphone maker Micromax. Hitching a ride with these regional leaders could give Cyanogen a boost in BRIC smartphone markets, which Canalys expects to offset weaker sales in developed markets through 2018. According to analysts cited by Forbes, that growth could put Cyanogen on as many as 1 billion handsets -- more than all the iPhones sold to date.
That growing user base is troubling for Google, since some of those companies are stripping Google services from Cyanogen's flavor of Android. In upcoming phones, Blu plans to replace Google Play with Amazon's AppStore, Google Maps with Nokia's HERE maps, and Google Drive with Dropbox and Microsoft's (NASDAQ:MSFT) OneDrive. It also intends to swap out Google search with Microsoft's Bing and Cortana and replace Chrome with Opera. In other words, Blu supports Cyanogen's dream of an Android ecosystem without Google.
That defiance highlights the schism between Google and members of the AOSP (Android Open Source Project). The AOSP is a community of developers and enthusiasts who promote the continued development of Android without intertwined Google services. AOSP members often strip out Google services to "fork" Android into "new" operating systems like CyanogenMod. Many Chinese Android OEMs also follow that same path, since Google services are mostly banned in China.
According to ABI Research, 29% of all Android devices shipped worldwide in the fourth quarter of 2014 were forked ones that Google probably can't monetize.
Google is worried about Cyanogen
Cyanogen's business strategy is unconventional, but it's attracted plenty of interest. The company recently raised another $80 million in funding, bringing its total funding up to $110 million. Last October, it rejected a buyout offer from Google, which presumably intended to shut down CyanogenMod. Back in 2013, Google notably booted Cyanogen's CyanogenMod installer -- which could overwrite Google-approved versions of Android with Cyanogen's OS -- from the Google Play Store, claiming that it violated developer terms. However, the aforementioned CyanogenMod themes remain available on Google Play.
Google's major rivals, like Microsoft and Amazon, would love to see their apps replace Google's on an Android-based system. Microsoft may also have invested an undisclosed amount in Cyanogen during its last round of funding, according to The Wall Street Journal.
Microsoft also recently partnered with Samsung to preinstall OneDrive, Office, and Skype on its Android devices, which indicates that CyanogenMod could feature a lot more Microsoft apps soon. This could be a win-win deal for both companies: Cyanogen gets the financial and ecosystem backing of Google's nemesis, while Microsoft gains a valuable foothold in the Android market.
Can Cyanogen evolve into a sustainable business?
If Cyanogen's market share grows big enough, it could possibly establish its own app ecosystem with a small following comparable to Samsung's app store initiatives. Since Cyanogen is Android-based, it would also be easy to port existing apps to Cyanogen's app store.
Cyanogen believes that after that happens, it can generate revenue from revenue-sharing deals with apps that integrate their services into Cyanogen phones. These include distribution deals, in-app purchase agreements, and customized services for certain countries. Analysts believe if that happens, Cyanogen could eventually generate more than $10 per phone sold, according to Forbes -- not bad for a company that started out as a collaborative hacker's project for rooted Android devices.
Cyanogen probably won't "put a bullet" in Google's head. However, Cyanogen's growth highlights a major blind spot in Google's ecosystem: defiant developers determined to transform Android into their own non-Google operating systems.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Google (A shares), and Google (C shares). 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.