BizPunkMitch Lasky's blog

Benchmark portfolio company Cyanogen announced an $80MM Series C round of financing earlier today. Cyanogen distributes an open version of Android to handset manufacturers, mobile operators, and end users around the world. Cyanogen’s deep compatibility with Android allows apps to run unmodified, giving Cyanogen customers an independent, fully-customizable, high-performance operating system with all the benefits of the robust Android eco-system. At this significant milestone for the company, I wanted to take a look at the state of Android.

Android is, arguably, the most important computing environment in the world. No matter how optimistic you are about iOS (or Windows Phone or Mozilla or Tizen or anything else), it’s a good bet that Android will power the majority of the world’s billions of smartphones for the next five years, and perhaps even longer. The key role Android will certainly play in wearable computing only adds to its considerable market power.

The Android juggernaut has a lot to do with Google’s innovative approach to licensing and their early commitment to open source. Open source distribution overcame the objections of the handset manufacturers and mobile operators who worried about OS lock-in, where Google might extract the highest-margin revenue from customers those operators and handset folks thought were theirs.

Android’s promise was that if a mobile operator felt threatened, they could compile their own non-Google Android from source, and run their own app store and cloud services. In practice, despite enormous investment by Samsung and others to offer alternative services, Android’s rise has been Google’s rise. Except, of course, in China, a market I’ll come back to discuss in a moment.

So why are we excited about the opportunity for a new, open Android operating system from Cyanogen? The answer has a lot to do with what is happening on top of the Android operating system: apps. Because, like Microsoft Windows and Apple OSX/iOS, Google both enables and competes with app developers who support its operating system, creating a fundamental tension in the market.

Five years ago, my partner Bill Gurley wrote about the brilliance of Google’s “less-than-free” Android distribution strategy. It played out more or less as Bill imagined it would, including the centrality of Google Maps. Bill saw Android as a defensive “moat” around Google’s search business. This was a logical assumption at the time, but the reality turned out to be a lot more complicated. The mobile eco-system we have in 2015 is dominated by apps not the browser-centric mobile web, as some anticipated. And that is a crucial difference.

The primacy of apps has three interesting implications for search, and ultimately for Android itself. First, the rise of messaging and social media apps has made traditional search less relevant — you find your content curated in your Twitter feed or on Snapchat, not via a search box. Second, a lot of high-value (read: monetizable) search has moved out of the browser into vertical apps. You look for restaurants in Yelp or OpenTable, you start your shopping search in Amazon, you look for car service in Uber. Third, the most lucrative “search” in mobile has turned out to be app installs which are largely driven from inside other apps rather than from search engine advertising that Google dominates (installs are a cornerstone of Facebook’s mobile revenue, for example). Mobile app companies have created considerable value riding this shift from search-driven discovery to app-driven discovery.

Google’s response has been to elevate its own apps and services — the Google Mobile Suite — to the central business position in Android, to de-emphasize the Android Open Source Project where the core OS resides, and to create leverage into 3rd party apps through an API that insinuates Google’s content and services, such as Map or Wallet calls, into 3rd party commerce flows. Google has doubled down on Gmail (and by extension the Google+ identity system), cloud storage through Drive, Google’s office productivity apps (Docs, Sheets, etc.), the Play store, Wallet, and most importantly Maps, which may be the most valuable and organically mobile search platform.

As late as 2013, at the Mobile World Congress in Barcelona, Google’s Andy Rubin was saying: “[O]pen is good … Competition is good. We built Android because there was no open operating system.” But as any carrier or handset manufacturer can tell you, Google has recently linked their attractive Android licensing to guaranteed distribution and placement of the Google Mobile Suite, and has started tightening compatibility certifications, ostensibly to “protect” customers. This is very troubling to carriers and handset manufacturers looking to create value through software, and very troubling for app companies competing with Google, particularly as Google has started increasing the “tax” for API access to things like Maps.

Everywhere, that is, except China. Politics, protectionism, and the threat of uncensored search have kept Google largely out of the Chinese market. Open Android, not Google Android, is the dominant smartphone OS in the country, with multiple variants compiled from Android open source distributions. Last December, the Chinese mobile company Xiaomi, whose phones run an Android variant (rumored to be a heavily modified version of Cyanogen’s CM9), became the most valuable private company in the world.

China’s mobile market is an interesting case study, because it has developed without the looming market power of Google (and, while China is a healthy iOS market, Apple doesn’t have the same hold on Chinese app developers that it has in the West). In China, the value in the Android eco-system extends broadly to 3rd party messaging (Tencent’s Weixin) and 3rd party e-commerce (Alibaba’s Taobao) without a commensurate platform tax. These Chinese mobile/internet providers have become incredibly powerful, valuable companies.

With mobile clearly the world’s most important commercial battlefield, and with four out of every five smartphones worldwide running Android, the role of an independent, truly open Android is of significant importance to every constituency in the mobile eco-system — from carriers to handset manufacturers, from app developers to end users. Cyanogen’s goal — to create a mobile operating system predicated on user choice and configurability (not just what theme to put on your desktop, but what app will handle which API call) — is going to be increasingly vital as the smartphone reaches every corner of the globe in the next half-decade. At Benchmark, we are excited to get the opportunity to help Cyanogen reach that important goal.

Comments - 0

Add Comment

(required)