Modu Unveils Tiny Cellphone with 'Jackets'

An Israeli startup has convinced wireless carriers in three countries to try a new concept: a tiny cell phone that pops into interchangeable 'jackets' to become a bigger, smarter phone – or into other gadgets to connect them to the Internet.

The company, Modu, is set to announce Thursday that it will launch the phone, also called Modu, on October 1 with Telecom Italia SpA in Italy, OAA Vimpel Communications in Russia, and Cellcom Israel Ltd.

Telecom Italia Mobile and Cellcom are the largest carriers in their respective countries, while VimpelCom is the second-largest in Russia.

The Modu is slightly smaller than the current iPod Nano and weighs 1.5 oz. It has a small color screen and a limited keypad, which allows it to work as a rudimentary cell phone on its own.

The jackets that will come with the Modu look like cellphones, with standard numeric keypads and other features like cameras. But they lack the antenna and chips that communicate with a wireless network, and this is where the Modu comes in – it pops into a slot, turning the jacket into a fully functional phone.

Modu founder Dov Moran said in an interview that the Italian carrier is excited about the concept because it can make cellphones more like fashion, tempting consumer to update their looks every few months.

"This allows you to make a summer collection and a winter collection," Moran said.

"The carriers really are interested in having more and more customers coming through their stores, rather than signing up and coming every two years to sign a new contract and get a new phone," said Daniel Amir, a chip analyst at Lazard Capital Markets in San Francisco. He called the Modu a potential 'game changer' in the cellphone industry.

The jacket is cheap to make, has almost no electronics, and doesn't need to be tested by the carrier to see that it conforms to its network standards. They can be themed, say, by focusing on music, with pre-loaded tunes, or have full keyboards for texting.

Moran estimates that carriers will be able to sell a Modu and two jackets as a bundle for about $280, a price that they can then subsidize to free or almost free with a two-year contract.

A shortcoming of the initial model is that it will use GPRS for data transfer. Roughly equivalent to dialup in speed, this will limit the Modu's usefulness, but Moran said the company is working on upgrading it to use HSDPA, a 3G technology.

Modu is also talking to consumer electronics companies like Magellan Navigation Inc., a California-based maker of GPS devices, and car-stereo maker Blaupunkt, a unit of Robert Bosch GmbH of Germany.

The idea is to have consumer electronics companies build slots for the Modu into their devices to give them network connectivity. That could allow a GPS device to receive updates on traffic or map changes. A picture frame with a Modu slot and loud speakers could act as a music-playing, picture-showing charging station.

Other cellphone makers have been sniffing at the modular concept. Sony Ericsson has filed for a patent on a modular phone. But Modu appears to be furthest along in its plan, and has crucial support from large carriers.

Moran, the founder of Modu, also founded M-Systems Ltd., which pioneered USB flash drives. The company was acquired by California-based SanDisk Corp. in 2006 for $1.6 billion.