When the entrepreneurs behind Tango, a mobile video-calling startup, founded their company a year ago, there wasn’t any competition to speak of. Based in Palo Alto, Calif., five miles from Stanford’s campus, Tango’s 17 engineers were just insanely focused on getting their breakthrough technology to market. “When we started, there weren’t any front-facing cameras on phones,” recalls Eric Setton, Tango’s co-founder and chief technology officer.

Today, with six patents pending, the nascent startup is launching a free, high-quality video calling service for iPhones and Android phones over any network (3G, 4G, or Wi-Fi). It’s a huge win for consumers, too, since it’s the first time two-way video calls work on–and between–the world’s top-selling smartphones. It’s a feat of interoperability that no other company has yet managed to pull off. By doing so, Tango has a good shot at helping make mobile-to-mobile video calling mainstream.

“Two years from now, everyone will talk on the phone like this,” says Tango’s CEO Uri Raz. “It’s the next level of communication.” Odds are he’s right. Two-way video-calling is fast becoming a must-have feature on all Internet-connected devices including phones, tablets and TVs. Tango’s founders didn’t set out for a heated fray with industry giants, but its technological prowess, along with incredible timing, puts the startup against Apple, Skype and Google–and a smattering of other competitors–all angling to get their video-calling software onto smart gadgets.

“Mobile video calling will soon become pervasive,” confirms John Jackson, a wireless industry analyst at CCS Insight in Boston. “It’s seen as a high-value area,” he says, but it’s too early to tell how lucrative. “Nobody knows how to size the market.” What is known: over a billion people will have smartphones by 2013. Mobile apps, considered a $6 billion opportunity today, could grow to $30 billion over three years according to Gartner.

Variations of two-way mobile video calling have been around for some time, predominantly in Japan and Europe, though its widespread adoption has been sullied by price, quality, and lack of compatibility. Tango essentially nixed those hassles, so callers could stop wondering whether a friend or colleague has the right phone, the right software, and the right network connection to receive a live video call.

Real-time video is increasingly seeping into our daily communications. Skype, which helped popularize this emerging trend, has 560 million global users making billions of minutes of calls every month–mostly computer-to-computer–and a surprising 40 percent of those are video calls. Live video streaming is exploding on sites like Justin.tv and Ustream where viewers watch billions of minutes annually. Twitter now embeds multimedia. And YouTube is testing live streaming for news, concerts, and sports. Expect live video feeds to stream directly to wireless devices, especially tablets and smartphones, with front-and-back cameras enabling even more video sharing and calling.

Nowadays, Skype is weaning itself away from desktops and getting onto smaller screens and smart TVs for video calls and conferences. Deals with Samsung and LG and Panasonic are underway. Verizon has numerous handsets loaded with Skype but there’s no video yet. Skype’s iPhone app is voice-only. Nokia’s N900 offers Skype’s video calling. And a Skype-branded mobile app for Android–possibly with video calling–may arrive this year. But, again, the clincher is getting good quality, handset-to-handset video calls working between different carriers, networks and devices to drive consumer adoption. This is Tango’s sweet spot.

Apple, which enthusiastically kicked off the mobile video-calling market stateside in June, is also vying to set the industry standard. Steve Jobs, Apple’s CEO, declared FaceTime, its video calling feature for the iPhone 4 and iPod Touch, will be on “tens of millions of devices” by the end of 2010. Sure, the user interface is characteristically slick; video and audio are high quality. And rumors abound that the next iPad will come loaded with FaceTime and a front-facing video camera. Still, that’s months away, and just for Apple products. Own another branded smartphone like Nokia’s Symbian or RIM’s Blackberry–two-thirds of the smartphone market? No luck. FaceTime’s potential is restricted because it only runs on Wi-Fi: that’s too iffy for calls outside the office or home. Obviously, this could be a strategic attempt by Apple to avoid overloading AT&T’s network. Apple is likely rolling out FaceTime slowly and closely eyeing user uptake. Video calls are notorious for chewing up bandwidth and could choke a carrier’s network: Wi-Fi doesn’t.

So what’s Tango’s edge?

For one, it’s here now and more ubiquitous than rivals like Google and Skype. Tango’s free mobile app is downloadable at the App Store and Android’s Marketplace: tango.me

Eventually, Tango plans to become even more ubiquitous and roll out to all smartphones including Nokia, Windows and RIM.

What really sets Tango apart, though, is the perfection of peer-to-peer (P2P) video streaming that can, apparently, “scale to hundreds of millions of people.” According to Tango’s executives, its video compression and delivery algorithms may be better than other P2P services such as Skype or FaceTime. Tango’s proprietary algorithms allow ultra-compressed video to move from handset-to-handset over cellular networks and Wi-Fi. This means improved performance with nominal infrastructure (i.e. server) costs. All of the bandwidth is handled directly. It’s a data connection, so call minutes aren’t eaten up. Setton, Tango’s technology lead, has a Ph.D. in electrical engineering from Stanford. He wrote the first book on peer-to-peer video streaming and contributed to the development of H264 or “MPEG4,” the video standard Tango uses.

“There’s a barrier to entry because the technology is difficult to do,” underscores Michael Birch, a computer scientist, and serial web entrepreneur who has invested in Tango. (Birch co-founded Bebo, an early social network, and sold it to AOL for $850 million in 2008.) “Peer-to-peer video conferencing over 3G, limited bandwidth, between normally incompatible devices is not something that’s very easy to do at all,” he says. “I don’t think it’s going to be a typical space like social gaming where you have hundreds and hundreds of startups.”

Having seen a live demo at the company’s office, prior to today’s launch, I can say Tango is impressive. Two-way video calling worked and appeared seamless between an iPhone 4 and Android’s HTC Hero. And there were no obvious glitches. Similar to Apple’s FaceTime, Tango’s app is elegantly and intuitively designed, and appears well integrated into the phone.

Getting started requires downloading Tango’s free app to your phone and handing over your email and phone number. That’s it. No registration, log in or profile needed. Whenever anyone in your existing address book downloads Tango, they’re automatically part of your Tango contacts and you can video call them immediately. An email or text invites others to “Tango.” Answering or placing a Tango call is exactly like a regular mobile call unless you turn on the video by tapping the red “Tango” button.

Tango’s coolest feature is the option to turn video on and off as you like. Toggling back and forth between video and audio–mid-call–is something Apple’s FaceTime and other products can’t do. Switching back and forth doesn’t interfere with calls either. Think about it. Bad hair day? Late night? Too shy to show your silly mug? No worries. “You control your camera,” says Setton, Tango’s CTO. Inevitably, most Tango callers will probably linger over regular audio calls most of the time, after first exchanging “hellos” over video, then switching to audio for the gist of the conversation. We’ve been trained to hold our phones to our ears and cheeks for so long, it feels more natural than putting the handset in front of you and staring at it for any length of time. That could change as the technology becomes more familiar. As with the iPhone, it probably won’t take long.

Using Tango, on a limited data plan, live video chatting for 450 minutes over 3G or 4G, takes about 2GB of data. How about battery life? Say you’ve become a Tango “power user.” A live two-way video call should last up to 180 minutes with an iPhone battery. That’s lots of face time.

Tango works with smartphones equipped with front and/or back cameras. Phones with two cameras can “swap” between the large and small screens to show what is being seeing in real-time. If you’re looking for a video repository, however, archiving isn’t an option. Tango doesn’t record or save any video streams as does Qik, another mobile video calling company with 3.5 million users. Qik has been around since 2006 but its service is often cited as buggy.

Going forward, it’s easy to imagine a mobile video calling service such as Tango’s being introduced into Facebook, LinkedIn or other social networks where staying in touch is becoming more real-time, interactive and media rich. Unfortunately, Tango’s executives before today’s launch didn’t entertain questions about the service’s future iterations.

Mobile ads won’t appear on Tango anytime soon. The founders don’t’ want to “interrupt the calling experience.” When asked how Tango plans to make money, they replied: “It’s not the focus right now.” Instead, they’re concentrating on growing a “healthy user base.” (i.e. dreaming of viral marketing.) Sounds a bit flimsy yet it’s not an unfamiliar or unthinkable refrain coming from a web startup. Facebook, also privately held, stayed mum on its potential revenue streams for years and is only recently talking more openly about diversifying beyond advertising. Tango’s founders did say, however, they’re considering experimenting with a “freemium” model like Skype: premium services for paying subscribers, free for the all the rest. With Skype reporting more than $400 million in net revenue during the first half of 2010, who’s arguing?

Futuristic visions of two-way video calling inspired by Dick Tracy’s wrist TV in the 1960s, Star Trek communicators, and Jetson-style conferences are becoming more accessible than ever. Decades later, though, one critical hurdle remains: “It’s still not clear that people want it,” says analyst John Jackson about mobile video calls. Historically, “People aren’t that comfortable with it,” he says. “It’s a behavioral change that consumers need to make.” In the weeks and months after launch, we’ll see just how many, and how fast it takes to truly, eh, “Tango.”

See Tango’s demos: https://sites.google.com/site/tangovideocalling/videos

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