Video Phones Are Coming. And This Time It's for Real

Ever since a mid-level engineer at Apple (AAPL) left a prototype iPhone in a Silicon Valley bar on Apr. 18, the tech world has been consumed with the ensuing drama. Will the person who sold the gadget to the blog Gizmodo go to jail? Were the police justified in seizing the blog editor's home computers? Getting less attention is the little dot just above the touchscreen on the device. It's a front-facing camera, and in all likelihood it's there for one reason: video phone calls.

Apple wouldn't comment for this story, and there's no way of knowing whether the prototype will ever get to market. Yet the device has generated excitement about mobile video communications. "With its size, market share, and influence, Apple could help move video calling to the mainstream," says Eric Kintz, a general manager at Logitech (LOGI), the computer-peripheral maker.

Dreams of video phones have been around since before Dick Tracy swapped his 2-Way Wrist Radio for a 2-Way Wrist TV in 1964. These days the technology is vastly improved. Forget tiny screens with fuzzy picture quality and voice-synchronization reminiscent of old Godzilla movies. Thanks to powerful microprocessors and luminous screens, smartphone video can look as good as standard TV.

Many industry executives say so-called 3G cellular networks now common worldwide are actually up to the task. "When the network isn't swamped, we're seeing speeds that are faster than most of us get on our DSL lines at home," says Joel Brand, vice-president for product management at telecom consultancy Bytemobile. He adds that while many consumers on 3G networks will suffer bad connections now and then, most big cities will have higher-capacity 4G systems by 2012.

Expect a wave of new video-communication technology by Christmas. Skype, based in Luxembourg, plans to introduce a version of its online video-chat service for cell phones. "We intend to set the bar on mobile video calling," says Russ Shaw, general manager of Skype's mobile business unit. Logitech's Kintz says his company will introduce a cell-phone version of its Vid videoconferencing service by the end of the year. "There's no question many of our customers will offer mobile video capability by this fall," says Joyce Kim, chief marketing officer at Global IP Solutions, which makes technology used by Google (GOOG), Yahoo! (YHOO), and others to make phone calls over the Internet. There will also be new hardware to run those services from Skype and others, including smartphones, tablet computers, and other gadgets powered by Intel's (INTC) soon-to-be-released "Moorestown" chip.

Mobile is part of a larger trend toward videoconferencing, whether it's on a phone, a PC, or a TV. Cisco Systems (CSCO) has begun trials for consumer versions of its $30,00-plus TelePresence systems used by corporations. Cisco Senior Vice-President Marthin De Beer says the product will be on the market by yearend. Logitech says it will also introduce video-calling for the home.

An obstacle to consumer acceptance of earlier generations of videophones was the thought of being seen in a bathrobe or without makeup. (Industry executives also fret about how to solve what we'll call "the nostril problem." People tend to tilt the phone away from their faces, which positions the camera in such a way as to give the callee a view up the caller's nose.) The current generation of Twittering, YouTube-ing over-sharers has fewer privacy concerns.

Millions of people already have video chats on their PCs and laptops."We think mobile video calling will first be embraced by tech adopters, frequent travelers, professionals, and young people who are engaged with social media and accustomed to watching Web video," says Skype's Shaw. Pankaj Kedia, an executive in Intel's Ultra Mobility Group, says computer-like smartphones, faster networks, and consumer readiness mean the technology is ready to take off. "The perfect storm is here," he says.

Then there's the Apple effect. If the new iPhone isn't a videophone, there will almost certainly be one eventually. The same goes for the iPad, the first version of which had no camera. No doubt, many would dismiss video calling as a gimmick. "I can't even make a phone call in San Francisco," says Broadpoint Amtech analyst Brian Marshall.

Still, Apple has a history of turning yesterday's geeky dreams into mainstream must-haves. Says Frank Meehan, who runs INQ Mobile, a handset maker backed by Hong Kong telecom carrier Hutchison Whampoa: "If anyone can make it work, it's Apple."

The bottom line: Apple's next-generation iPhone could move video calling into the mainstream. Expect a wave of new products by Christmas.

With Joseph Galante, Olga Kharif, and Connie Guglielmo

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