Cyanogen – The great skirt escape

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Cyanogen promises clients an escape from under Google’s skirts.

• Cyanogen is a company on a mission with 120 employees and raising $100m to take its business to the next level.
• Cyanogen is very much like Canonical except that it uses Android as its base rather than Ubuntu.
• Both of these companies adapt community-built handset software to a point where a customer can use it to deliver his ecosystem over a mobile device.
• In return for the tools and help in rolling out Digital Life services on a mobile device, the ecosystem owner or handset vendor pays Cyanogen or Canonical a per handset royalty when it ships commercial product.
• RFM research indicates that this royalty is between $6 and $2 per handset based on volume.
• This business model looks to have evolved from the early days of smartphone OS licensing pioneered by Symbian and Microsoft.
• At the moment Cyanogen offers its software to OnePlus, Alcatel-TCL and Micromax and I suspect that volumes in 2014 were tiny.
• RFM estimates that there are around 120 people working at Cyanogen, almost all of whom are engineers.
• This would give an OPEX run rate of around $1.8m per month and requiring something like $26m in revenues to break-even.
• At an average of $3 per handset, Cyanogen’s customers would need to ship 8.6m units to break-even which given the size of the smartphone market, is not unfeasible.
• However, it appears that Cyanogen has much bigger ambitions as it intends to go beyond the OS and to begin developing some of the services itself for customers to implement.
• Furthermore, as Google, takes more and more of the functionality of Android within its own Google Mobile Services (GMS) software, Cyanogen will have to write more code of its own to fill the gap.
• This combined with the desire to do far more than just deliver the OS is what I think is behind Cyanogen’s raising of $100m in fresh funding.
• At its current size, this would be enough to fund the company for 5 years and consequently, I think that this signals a significant ramp up in its size.
• Cyanogen has already stated that it will have its own app store within 18 months and I suspect that many other Digital Life services are likely to follow.
• This will increase the price that it can charge as a per handset royalty, but at the same time costs are going to increase materially.
• If Cyanogen can offer a complete suite of software that allows an ecosystem company to roll out its Digital Life services on mobile and still maintain its differentiation, then it has a reasonable chance of success.
• On the other hand, the software will have to be very flexible and completely invisible to the user in order to appeal to customers.
• This is harder than it sounds to achieve, and Cyanogen will have to build its software suite with great care to ensure that it can be all things to all customers.
• I suspect that the appeal of this offering will be most prevalent in China and India where ecosystem development is just getting underway and where most vendors are very keen to get out from underneath Google skirts.
• This will work in emerging markets as most users are unfamiliar with Google’s services and do not demand them meaning that they can be successfully offered something else.
• Cyanogen biggest targets should be Baidu, Tencent, Alibaba and China Mobile all of whom are intent on creating their own ecosystems but are having some difficulty in doing so on their own.
• These 4 are already engaged in building their own ecosystems based on Android but seem to be having great difficulty getting something workable off the ground.
• The biggest issue here is control as I suspect that all four of these are very keen on having complete control of the software internally.
• This is why, I think that these companies will buy rather than rent making Cyanogen and Ubuntu less attractive as an option to escape from Google.