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But the same file can play on the iPod, within QuickTime, and people who own Apple TVs.
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But quality will be still terrible without deblocking (annoying blocks will kill your eyes
. Even 1.5Mbps (limit for iPOD) is not enough to achieve reasonable quality at 640x480 without advanced settings like Deblocking,CABAC,Trellis,many r-frames,b-frames and so on. iPOD is not PSP where you can activate almost all settings and enjoy high quality movies on high resolution display at 512kbps.
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...but you can take advantage of the iPhone's higher resolution.
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Quality will be alot better if you use iPhone's native resolution with regular profile.