FaceTime for iPhone is video calling, much along the lines of Skype. The way it works is when you have it setup on your phone you can choose to make video calls so you can see who you are talking to and they can also see you.
Apple uses a special protocol called STUN (Session Traversal Utilities for NAT) to determine your IP address after you have chosen FaceTime to talk with one of your contacts. From this point, your iPhone will use another protocol to invite your contact’s iPhone to accept the FaceTime conversation. When your contact accepts the invitation, you will be able to video chat together.
Set up FaceTime:
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From your iPhone, go to settings.
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Choose FaceTime and make sure it’s turned on.
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Choose “Use your Apple ID for FaceTime”.
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If you need to, enter your Apple ID and password.
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Choose email addresses and phone numbers from your contacts that you want to FaceTime with.
Resource: The App Champ