Transforming the Cell Phone

Modu is hoping its modular, multi-function cell phone, designed to resemble a domino, will start a cascade of innovation in consumer electronics

It was back in 2002 that Dov Moran first began grumbling to friends about the modern cell phone. Why couldn't his phone suddenly sprout a keyboard and a large display on days when he needed to respond to a lot of e-mail? Why couldn't the phone shrink into a tiny little thing when he didn't? Why couldn't it…?

Well, now it can. On Feb. 7, Moran's new company, modu, unveiled a tiny new cell phone that can work on its own or be slipped into assorted "jackets" that transform it into different types of devices. Slide it into a jacket with a 3½-inch screen, and the device turns into a media player perfect for watching movies. Slip it into an iPod-like sleeve, and modu becomes a music player with dedicated buttons and a screen for album art.

From Personalization to Customization

modu is just one of several companies, including Sony Ericsson , that are exploring the market potential for "modular" cell phones made of detachable components that can be snapped on or off to suit specific needs. If they gain traction, this Lego-like approach would bring a sudden burst of customization to an industry where personalization has amounted to little more than detachable face plates to change a phone's color.

There would appear to be demand among cell phone users. A recent survey by CommScore (SCOR) found that 41% of the 18- to 24-year-olds and about a third of the 25- to 34-year-olds said personalization of cell phones was important. But for now, whether modular design will prove to be the next big thing in wireless is a big unknown. "We need to see how carriers respond," says Tim Luke, an analyst with Lehman Brothers (LEH).

The modu phone module, which weighs only 1.3 ounces and is smaller than a credit card, could conceivably serve as a sidekick to much more than handheld devices. It could, for example, be slipped into a bedstand alarm clock to display incoming text (SMS) messages. Inserted in a car's dashboard, modu could allow for hands-free calling over the stereo system or provide an address book for the car's GPS navigation system. Slipped into a laptop, modu could provide mobile Internet access. modu says Philips Electronics has shown interest in developing compatible products. Efforts to reach Philips for comment were not immediately successful. "This is the tip of the iceberg," says Moran. "This is a way to provide communications capability to any device."

Bringing modu to Market

Moran, who previously founded a flash memory business that he sold to SanDisk (SNDK) for $1.55 billion in 2006, has sold some impressive investors on his concept, starting with SanDisk. The firm, also backed by Genesis Partners and Gemini Capital Fund Management, hopes to raise more funding this year and go public in 2009. Moran also has cleared a difficult hurdle in the wireless industry by convincing some mobile service providers to offer the new device to their customers. modu says Telecom Italia Mobile, Israel's Cellcom, and Russia's VimpelCom will launch the phone in October. The company hopes the phone will arrive in the U.S. in early 2009, but no carrier deals have been announced.

Still, it's not exactly an easy market that modu is traying to invade. The launch comes at a time when Motorola is stumbling against the ropes and looking possibly to sell off its cell phone business. Meanwhile even phone makers that seem to be thriving are scrambling to differentiate their designs to better compete with Apple's (AAPL) iPhone and bracing for competition from new devices based on Android, Google's (GOOG) new mobile software platform.

Yet it's clear that modu may be onto something. On Jan. 31, Sony Ericsson filed a patent for a phone whose parts can be detached and reattached to create different configurations. The various modules can also communicate with each other on a wireless basis while detached so that, for example, you could leave the bulkier part in a pocket or bag while you take a call on a smaller piece with a display. While the company has yet to announce any commercial modular products, "it's a very forward-looking [peek] at what potential [devices] could look like," says Jon Mulder, a product marketing manager at Sony Ericsson.

In fact, modu won't be the first modular phone on the market. Willcom, an Asian cellular carrier controlled by the Carlyle Group, introduced a modular handset back in 2006. The basic phone comes with six modules, including a global positioning system, a fingerprint reader, and a camera that can be snapped on and off as needed. Another startup named Bug Labs plans this year to introduce up to 20 different interconnecting consumer electronics modules. "What we are really trying to do is turn the consumer-electronics industry on its ear," says Bug Labs founder Peter Semmelhack. "Why can't anyone build whatever electronics they want? Anybody can snap together the hardware. My six-year-old should be able to do it."

Domino Theory

modu says it will initially bundle two jackets with the phone module and sell the package for about $200, though some carriers might offer discounts. Later on the company expects to introduce other jackets with different functions for $20 to $60 each.

The main module is made of stainless steel so as to resist scratches when inserted into jackets. It features a small screen but no typical dial pad. Instead its black front sports seven buttons marked with domino-like dots which, when pressed, allow the user to scroll through menus and initiate and end calls. "Usually people call using the address book," says Itay Sharman, modu's CTO. "They only need to select, not dial."

The modu was designed with help from Lunar Design , which has created phones for the likes of Pantech and Motorola (MOT). The design was inspired by a black domino piece. "A domino is simple, familiar, memorable," says John Edson, president of Lunar Design. "Our goal was to create something where, when you saw it, you said, I know exactly what this is."

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