I’ve spent a bit of time over the past few months digging into Cyanogen. Cyanogen is an Android ROM that now has aspirations to be a full mobile OS Android alternative. Cyanogen is running on devices such as the OnePlus and the Micromax YuPhone in India. I have many relationships with Silicon Valley VCs who often come to me for assistance doing due diligence on companies looking to enter markets I have expertise in. My insights and research are often part of the process investors use to decide whether to invest in a company or not. One of those I’ve provided assistance on is Cyanogen.
My overall thesis on the mobile landscape is that the dominant mobile operating system provider is at a crossroads. I wrote about this in my article the “Android Schism”. In short, Google is in a tough spot as they try to have Android appeal to both their most lucrative customers who are part of their profitable existing 1.3 billion active users. When we wrestle with the observation that the most profitable customers on the planet are all now online and using primary devices to access the Internet with smartphones and PCs, then we recognize all the growth of new Internet users is going to come from customers with less disposable income, less income overall and, from a monetization standpoint, dramatically lower average revenue per user.
Interestingly last year, in what seems to be counter to what many assumed about mobile growth, both China and India saw declines in smartphone shipments. So we ask ourselves why? The answer lies in the availability of low cost smartphones. Essentially, those who can afford smartphones have them. The rest will come online when prices get low enough. In many cases, we just weren’t there yet to continue the growth in those markets. 2015 will bring a different set of circumstances.
So why does Cyanogen matter? The bottom line is nearly every handset vendor I talk to is looking for every possibility to not have to partner with Google. When I say partner with Google, I mean with Google services not necessarily Android. So this brings us to Android’s fork in the road. In this next phase of mobile, the next two billion consumers we bring online are new to the Internet and the smartphone is their first computer. This customer group has dramatically fewer demands on their devices and only need a few simple apps and services. I could make a strong argument that Google’s services over-serve this next coming two billion. This is where handset OEMs see an opportunity to move away from what they view as a stranglehold Google has had on them. And I believe this opportunity exists for them as well. This is where Cyanogen comes in.
What makes Cyanogen interesting is that an OEM can choose to use them to create a mobile OS solution that includes Google services or not. Cyanogen offers choice in a way Google refuses to for handset OEMs. In this coming era, where the business model is shifting from hardware to services, choice is going to be essential. Hardware companies have to learn to be services companies and services companies have to learn to become hardware companies. When the bulk of new smartphones sold in the next four to five years are at prices less than $150, money will not be made in hardware but made in other areas. Cyanagoen offers handset brands, or services companies looking to get into handset brands, an opportunity to layer value on top of Android in ways Google does not want to allow.
The other key point for Cyanogen is how, outside a very small few handset OEMs, most have no software expertise. Companies like Samsung, HTC, LG, and Xiaomi, have some internal capabilities to customize Android software but most do not. Cyanogen offers hardware companies or services companies who want to get into hardware a customizable and turn-key solution with or without Google’s services. Outside of Cyanogen, I’m not sure who else is offering such a thing.
The counter to Cyanogen is that if Google figures this out and adjusts their strategy accordingly to offer a similar package like Cyanogen. Or if Google adjusts their policies and embraces open Android in new ways. However, what we are observing is Google is trying to control and actually “close” open Android with each new Android update. While Google thinks this deals with the open Android issue, it really just validates it and bucks the overall trend rather than embrace it. In fact, what Google is doing to control open Android is actually pushing more people toward Cyanogen than away.
One last point for Cyanogen. Google is not in China, yet the Chinese ODM ecosystem is essentially opening up the equivalent of contract manufacturing for smartphones. I’m fond of saying it isn’t the Chinese brands likely to go global but the Chinese manufacturing ecosystem under the guise of many local and regional brands. Wico in Europe, Micromax in India, SmartFren in Indonesia, and Cherry Mobile in the Philippines. Cyanogen has been able to penetrate the Shenzhen ecosystem both through relationships with Qualcomm and MediaTek. This is a huge deal, and one that nearly seals Cyanogen’s opportunity to actually be a third OS in this next phase of mobile.
I’m convinced Google is going to focus more on strategies to increase their monetization tactics of their existing, most profitable Android customer base. The only variable that could alter Cyanogen’s plans is if Facebook provides a similar solution. Yet, I think it is more likely Facebook is a potential Cyanogen partner rather than competitor.