High-flying Modo takes a crash dive

Wireless technology could open the Internet to billions of users. But the market is so unstable, it can fool even the best venture capitalists. Consider as evidence the untimely demise of Scout Electromedia.

Scout closed its doors on Oct. 24, less than two months after launching a product that was dubbed "brilliant" by analysts and earned Scout the title of "company to watch" at IDG's DemoMobile 2000 show. Scout sold a $99 hardware device, called Modo, that delivered an online magazine and localized entertainment information through the U.S. pager network. The company was working on alphanumeric text messaging and two-way transaction capabilities and intended to build communities of users on the Web.

Aimed at 18- to 34-year-olds looking for interesting things to do, Modo was becoming a hit in New York City, whose streets were decorated with four-color Modo stickers pulled from ads in The New York Times. Virgin Megastore and other outlets sold the device, and Scout was expanding its business to other cities.

Analysts were especially taken with Modo's intuitive design, which allowed users to navigate through the interface using a wheel, and its avoidance of the subscription model favored by telcos. However, some did view Scout's plans to produce its own magazine-which Scout CEO Geoff Pitfield said would include writers chronicling "the soap opera of their lives"-as risky because of the potential cost.

Jim Forbes, who produces DemoMobile, attributes Scout's death to Internet incubator ideaLab's decision to pull funding from the company. "We're extremely aware of the dangers of selecting a young company to appear on stage and then not be able to sustain its business, and we are keenly disappointed in ideaLab," Forbes said.

On Oct. 18, six days before Scout closed, ideaLab officially postponed its IPO, citing volatile market conditions. Several of ideaLab's Internet start-ups recently have suffered lay-offs and other setbacks. IdeaLab will not comment except to acknowledge that it was a minority investor in Scout.

Launched in early 1999, Scout raised more than $20 million in series A and B funding from ideaLab, Techfund Capital, Chase Capital Partners and Flatiron Partners, according to Forbes. Chase Capital and Flatiron principal Seth Goldstein, who was on Scout's board, did not return calls seeking comment; Techfund could not be reached for comment. Scout's Pitfield declined requests for interviews.

Investment in the wireless market will continue, although how the market will develop--especially in the U.S.--is still anybody's guess. Sun Microsystems this week launched a $100 million venture fund for wireless start-ups and thinks its chances of finding good companies have improved since the stock market crash in April.

"The valuations are more reasonable, and people are working harder on their businesses and business plans," says Sun technology director John Fowler. "I was wading through lots of junk. These are the good days."

Web integrators Zefer and Razorfish also are forging ahead with wireless practices and Sun alliances. Razorfish is public but struggling. Zefer is private and has delayed its IPO twice, but the company recently raised $20 million.

Analyst Amy Wohl, president of Wohl Associates, says the potential of the U.S. wireless market is overblown. "Compared with the enormously high penetration rates in Europe, those in the U.S. are laughable. Absent a single, cohesive infrastructure in the U.S., it's not clear that wireless will take off any time soon."

In the meantime, Modo owners are out the cost of the device, and several are auctioning them on eBay. "Own a piece of history," begins one sales pitch. "The kamikaze handheld! One minute flying high and selling out all over New York City...this is destined to be a museum piece!"