Will They Really Modu?

I’ve been in Tel Aviv for almost two days and I still haven’t been able to shake off the jet lag, mostly because I’ve been so busy catching up with old friends, making new ones, and learning all I can about what’s going on in this tiny country, which has the highest number of startups outside of Silicon Valley. Here, working for a tech company is as much a part of life as being a member of the Israel Defense Forces.

I typically write about a startup after hearing about it from many different sources. It doesn’t matter if the chatter is positive or negative; if people make mention of a company, unprompted, in casual conversation, there’s almost always a good story behind it. These days Israelis are talking about Modu.

According to the chatter that I’ve heard while sitting in cafes and bars here, Modu, which was started by M-Systems founder Dov Moran (who sold that company to SanDisk for $1.6 billion), may already have or is close to raising a whopping $100 million from investors including some of its partners. The Kfar-Saba, Israel-based company has backing and relationships with SanDisk, Texas Instruments, Telecom Italia, BeeLine (VimpelCom) of Russia and Cellcom of Israel.

When I asked Guy Horowitz, director of strategy for Modu, about the funding, he declined to comment. Regardless, the chatter isn’t focused on how much money the company might be raising (it’s already raised $20 million from investors including Gemini Israel Partners and Genesis Partners). Modu is the first Israeli startup aiming to hit a home run in consumer electronics.

Modu has developed a tiny, 2.5G mobile phone — about the size of a cigarette lighter — that uses a Texas Instrument chips to pack in features including music playback, FM radio, GPS and of course, tons of memory.It is a mobile phone module that can be inserted into a sleeve. And depending on which sleeve it’s inserted into, its feature focus will change.

A sleeve with a focus on music can turn the phone into a music player. A sleeve with a Qwerty keyboard can turn it into a messaging device. What makes it possible is a tiny connector port hidden at the bottom of the device that interfaces with these sleeves.

“We are taking our cues from the fashion industry,” says Horowitz. Indeed, just like fashion changes every season, people can swap and change their sleeves but keep the basic innards of the phone — with all information, such as address book and music, intact. With each different sleeve, while basic functionality remains the same, the focus shifts to another function. And in the same way that you buy shirts from, say, Banana Republic or Faconnable, Mobu hopes that one day you’ll be able to buy these sleeves not just from them but also from retail stores, carriers and even small, specialized designers who will come-up with sleeves.

“Today it takes about 12 to 18 months to bring a phone to market,” says Horowitz. “And phone companies need to sell millions of units to recoup profits.” Modu, in comparison, can build and bring sleeves to market in less than a quarter — and they only need to sell some 100,000 of them to make money. From that perspective, their plan seems quite logical.

But Modu still has lots of work to do. After launching at Mobile World Congress in February, it has yet to deliver a product. It plans to launch its phone sometime this year, but it will only be a 2.5G version. A 3G version won’t be ready until 2009.

I think the lack of a 3G device is going to prevent Modu from getting any meaningful traction. Apple, while a newcomer to the mobile market, was able to buy time for a 3G version, mostly because it had a strong brand and a loyal cadre of fanboys (and gals.)

The lack of a well-known brand will prove a challenge for Modu, especially since the company is aiming for fashion-conscious users. While these consumers can afford to buy new sleeves to “show off” their expensive toys, this same group is almost perversely married to “brands” and would pay a premium for them. Carrier-branded phones, on the other hand, might not hold as much appeal. As a result, Modu needs to get a lot of “brand names” to develop “sleeves.” And in order to do that, it needs to spends tens of millions of dollars.

Horowitz said the company’s carrier partners are going to be spending millions to promote Modu devices because it would allow them to push mobile brands into the background. I wouldn’t hold my breath, for carriers’ loyalties are worse than the fidelity of a free agent in baseball.

Finally, Modu is going up against entrenched players with deep pockets, who can use discounts as a way to destroy the company’s plans. And a desperate handset maker, like Motorola, could always copy Modu’s idea.

But at least it makes sense why this company needs more than $100 million in VC backing. In fact, I get the feeling that it won’t be enough. Still, the fact that they’re doing something this audacious makes their story one worth following.

How Modu Works:

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