Mobile Video Phone Industry to Get Boost from Apple iPhone 4

Apple's iPhone 4 with FaceTime videoconferencincg
Apple's iPhone 4 with FaceTime videoconferencincg

Five years ago, Deutsche Bank analyst Jay Goldberg tried to make video calls using a Nokia (NOK) smartphone over an AT&T (T) wireless network. That effort faced two challenges: terrible connection quality -- and no one to call.

But Apple's (AAPL) iPhone 4 debut is expected to help get the fledgling concept off the ground in a big way, analysts say. It's only been in recent months that mobile videoconferencing has been gaining traction, with the recent Nokia N900 Skype-enabled video phones and Sprint's HTC EVO 4G Qik-enabled phones.

Building Critical Mass

"The fact that Apple has made a [software application] that's easy to use and there'll be a decent number of people with that video capability will help," says Goldberg, a mobile phone analyst.

Apple announced that its iPhone 4 will feature FaceTime, a mobile videoconferencing software application, and that video calls can only be made via WiFi to another iPhone 4 user.

Goldberg's colleague, Deutsche Bank Apple analyst Chris Whitmore, noted in his report: "We believe the video calling feature (iPhone 4 to iPhone 4) will spur upgrades as the network effect encourages faster adoption (i.e. multiple family members may upgrade simultaneously). In addition, we expect FaceTime to be rolled out across many Apple products over time (iPads, etc)."

A smattering of smartphone manufacturers already produce devices with two cameras to allow video calls, and for those that don't, the barrier to entry is low, says Mark Sue, an RBC Capital Markets mobile phone analyst. "Videoconferencing is nothing that can't be replicated by others," he notes.

Telecom Rates Can Be Prohibitive

Although developing a smartphone with two cameras may not be problematic, the sticking point may come down to convincing telecommunications carriers to offer affordable rates to the data-hogging devices, say analysts.

While WiFi hot spots provide a free alternative for video chatting, getting onto the network could prove costly. AT&T, for example, discontinued its unlimited data service plan in the weeks prior to the iPhone 4 debut. Videos consume a tremendous amount of bandwidth as they hurtle down the pipes, and AT&T will charge $15 for 200 megabytes or $25 for 2 gigabytes.

Not only is the cost of connectivity a factor, but the price for a phone under a pre-paid plan, or one that comes without a contract, can be prohibitive, notes Matt Robison, a mobile analyst with Wunderlich Securities.

"I think getting a video phone is far down the list of what consumers may want in the long run," Robison says. However, he adds that smartphone makers are likely to add video-calling capabilities to handsets over the long run.

Can Apple Sell Beyond Upgrades

The video-calling feature will probably help Apple get its current iPhone customers to upgrade, Robison says, but working that magic overseas where potential customers favor pre-paid phone service with smartphones that cost substantially less than in the U.S. could make reaching that market a little more challenging.

Nonetheless, some industry players remain optimistic.

"The next generation of innovation involving video calling will not be bound to the computer. It's clear to us at Skype that mobile video will become increasingly important to our customers in the coming year," Skype said in a statement. "We're seeing a proliferation of video calling shared between all kinds of connected devices. It's on computers, televisions, and it will eventually be coming to mobile devices, too. We envision a world where video plays a larger role in the way we communicate. We're betting big on video, and we intend to set the bar on mobile video calling, and it's something we're going to do this year."

And here's one factoid the company threw out: 36% of Skype-to-Skype calls involve at least one party who is communicating via a video call.