Video Phones: Will IP make them mainstream?

The video phone is a kind of nagging obsession in the North American communications industry. The idea just won’t go away. Ma Bell first started talking about and demonstrating “picture phones” in 1954. Consumers who tried them at Disneyland and the New York World’s Fair in the 1960s said they didn’t like them, but Bell kept pushing the concept anyway, right up until the early 1970s. The video phone went exactly nowhere. But now it’s back—as the IP video phone.

Will it find a market this time? And if it does, will the IP video phone be primarily a consumer gadget or a business tool? Or both?

The video phone wasn’t really away that long. By the late-1990s, Net geeks were experimenting with video calls over the Internet using first-gen VoIP softphones and inexpensive webcams. Instant messaging (IM) services have offered mostly inadequate video softphones for a few years. More recently, vendors inspired by the successes of Skype and Vonage have begun to push new hardware and software products that may actually be good enough to make video telephony a reality. Maybe.

Packet8, a VoIP provider, has been selling a hardware video phone for several months. Motorola earlier this year introduced its $500 (with rebate) Ojo hardware video phone. Sony introduced IPELA, a line of business-targeted IP video products that straddle the line between telephony and conferencing. Viseon, an Irving, Texas start-up, recently introduced the VisiFone, a hardware product that doubles as a Web browser. Viseon hopes VoIP service providers will offer it at a subsidized price of $99. It’s talking to a few. And companies such as SightSpeed Inc. and iPhone2 have developed soft video phones and peer-to-peer services they claim rival the quality of the hardware products.

Altered landscape?
Why do these vendors think the video phone will find a market this time? John Buffett, chief information officer at iPhone2, points out the obvious—that the penetration of broadband connectivity and improvements in video codec technology mean that it’s now technically feasible to unicast full motion video synched to audio. “Everything has really come together in just the last few years,” Buffet says. We’ve tried the iPhone2 technology; it’s surprisingly good, though far from perfect.

But neither Buffet nor Viseon chairman and CEO John Harris can point to any market research suggesting a pent-up demand for video phone technology. Developing the market may require a lot of missionary work. Jupiter Research analyst Joe Laszlo says it’s the human factor challenges, not the technical ones, that will be toughest for the nascent video phone industry to overcome.

“There are some situations where video would be great—when grandma and grandpa are talking to the grand kids, or [in conversations between] any loved ones who are separated,” Laszlo says. “But there really are not that many [other] clear-use cases where you can say, ‘Yeah, video would really add a lot [to this conversation].'”

Furthermore, there are reasons why people might not want to use video, he says. Many multi-task while talking on the phone, for example, which in a video call may send the message that I’m only half listening to you. Video supposedly restores the 80 percent of human communication that is non-verbal, but in fact most people have become very adept at communicating what they want on the phone without it—and may prefer some body language not be conveyed.

“I often make faces while I’m talking on the phone that I wouldn’t want the other person to see,” Laszlo says. “Users will definitely have to take a lot more care about what they give away.”

It’s too early to start trying to measure the market, he says. The only evidence his firm has about consumer attitudes to video telephony is not very promising. In a recent Jupiter survey, only 5.4 percent of broadband users said they made a video call in the last six months.

“That says to me that there’s a whole lot of broadband users who aren’t thinking of doing this yet,” Laszlo says. “For vendors looking to market solutions, the good news is that the market has nothing to do but grow. But don’t expect it to grow very quickly. And the existing user base is very, very small.”

Hardware vs software
Laszlo is particularly bearish about the market for hardware video phone products like the Motorola Ojo, which he believes is absurdly overpriced. “I have no hope for the hardware side. I don’t think there’s any market there. Given the penetration of PCs, the vast majority of which are connected to the Internet, I have trouble figuring out why anyone would need a separate device to communicate via video.”

That is perhaps a peculiarly computer-centric perspective. There may still be lots of people who don’t have computers, or have them but are not comfortable using them, and who could benefit from video telephony.

Certainly vendors, both hard and soft, are convinced there is a market. Viseon’s Harris says, “We see pervasive adoption of the VisiFone at the $99 price point.” He and Buffet both confirm it will initially be a consumer market, although both companies already have plans to tackle government and enterprise segments.

Consumer vs business
It makes sense for Viseon to go after consumers first for a few reasons, Harris says. For starters, it’s easier to deploy the technology to consumers’ homes than to businesses. All consumers need to do is take VoIP service. Enterprises have to switch to IP PBXs. Some have already done this, but the transition to IP telephony in the enterprise still has a way to go. It also makes sense because VoIP carriers like Vonage are investing most of their marketing resources in building residential subscriber bases.

“Trying to get consumers to adopt this type of product is really the Holy Grail of video communications,” Harris says.

iPhone2 is also targeting consumers first, initially in a partnership with online computer seller TigerDirect. Buffet says TigerDirect will ship 10,000 PCs a month preloaded with the iPhone2 ImagePhone software. He claims the company is close to announcing another distribution deal with an international broadband ISP. It is selling unlimited peer-to-peer video calling for $9.95 a month.

“For the debut of the product we’ll be focused on the consumer,” Buffet says. “But we’re testing now with several large real estate organizations that want to be in constant communication with their realtors around the country. And we’re dealing with a few municipalities as well. There is definitely an enterprise solution here.”

He says the company will launch a business version of the product in the second quarter of 2006. Two years from now, the ratio of consumer to business users will be about 60:40, he estimates.

Specialized markets
Harris claims Viseon is already talking to prospective government clients, including agencies involved in the war on terror. They see the VisiFone as a low-cost solution to communicating effectively with overseas operatives. The company plans to develop an enterprise version of the VisiFone that will use the same core technology and form factor as the current consumer model but will include an API allowing companies to hook into corporate applications to, for example, display company directories on the phone’s screen.

Even at a price point of $500, Harris believes such a product will find a ready market among the country’s estimated 700,000 teleworkers, people who work at home some or all of the time. “The biggest complaints of teleworkers are that they feel they don’t belong. Video can alleviate that,” Harris says. “A $500 VisiFone would be less expensive than a PC and the maintenance costs would be no different than for any other IP phone.”

Viseon has begun the process of getting its technology certified by IP PBX vendors and hopes to sell to businesses through phone equipment resellers. Harris estimates the ratio of consumer to business customers two years from now at 70:30.

Will the video phone market these vendors anticipate actually materialize? One thing is certain. If it does, start-ups like Viseon and iPhone2 will be in tough competition against some very heavy hitters. Motorola and Sony are already there. And if there’s a buck to be made, Microsoft, a video softphone pioneer, is sure to jump in with both feet.

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