By Sinead Carew and Franklin Paul

NEW YORK (Reuters) - With a nod to the notion that mobile phones have become fashion accessories, Israel's Modu says it can make $1 billion in revenue by selling "jackets" for its tiny new cell phone that give the device new functions as well as a new look.

Start-up Modu's plan is to sell a range of casings along with its cell phone so that consumers can cheaply transform phones into anything from a messaging device, a music player or a gaming device, according to founder Dov Moran.

The phone morphing system goes on sale with three service providers in Russia, Italy and Israel in October, around the same time the company expects top fashion houses to have developed phone jackets for style conscious users.

By January next year the phone will also slot into consumer electronics devices it calls "modu mates" such as digital photograph frames, cameras, clocks or navigation systems to give such devices wireless connectivity.

Modu, whose backers include SanDisk Corp , says it can generate $1 billion annual revenue in 2011 in the fiercely competitive mobile industry, which is dominated by market leader Nokia and its four biggest rivals.

"It's not like the top five companies where everybody makes devices similar to the others," said Moran referring to Modu, in which he has invested $5 million.

"We're going to change the cellular market," he said.

So far the mobile business of Telecom Italia , BeeLine, owned by Russia's Vimpelcom and Israel's Cellcom Israel have all agreed to start selling the phone in the fourth quarter, according to Modu.

MUSIC MODU

Universal Music, owned by Vivendi is also looking a developing music-geared jackets for the phone, which Modu will display at the Mobile World Congress wireless show in Barcelona next week.

The company, which has been in operation about a year, has had so much interest in the device that Moran said he expects to be able to raise $250 million to $350 million in a Nasdaq listing in 2009, a year before the company expects to break even and make a small profit.

In the meantime, Modu, which has already raised $20 million including $5 million from Sandisk, hopes to secure another $100 million in funding this year with a $30 million round in a few months from existing investors and new venture funds.

"We do have a lot of interest," said Moran, the inventor of the USB flash drive, a widely used portable storage device.

In a market where No. 3 mobile phone maker Motorola Inc is struggling amid tough phone design competition, it may not be easy for a small upstart like Modu.

But Lehman Brothers analyst Tim Luke noted that devices such as Apple's iPhone and the Blackberry from Research in Motion have done well against established rivals because they too had taken new approaches.

"It's going to be important over the next few weeks to see how carriers react," said Luke, noting that carriers may quickly decide if they like the product at the Barcelona show.

He also said that the company executives had a good track record. For example, Moran founded msystems in 1989 and sold the flash memory company to SanDisk in 2006.

Modu said the phone, which is being manufactured by Foxconn , would include chips from Texas Instruments .

While carriers will set the price of the device, the company said it expects them to offer it free or very cheaply with a small selection of jackets.

Eventually Modu expects its jackets to go on sale everywhere from bookstores to airport shops, where travelers could pick up a jacket designed with in-built features such as restaurant guides for their destinations.

(Editing by Kim Coghill)
© Copyright 2007 Reuters.

Photo:
Scree grab from Modu Mobile promo video on the Modu Mobile site.