toyvan,
The following analogy is not perfect, but hopefully gets the concept across. Or in other words, yes, I am aware there are imperfections in the analogy.
MPEG-4 is a standard for how a video file is wrapped. The encoding options have to do with how the data is actually written down in the file.
If MPEG-4 was a book, it might be a type of binding like paperback. The encoding options would be the language, and font the information in the book was written in. Some books would be written in "code" and not readable without the appropriate code key.
Which languages, fonts, and codes are readable by a recipient (device), is going to vary.
The iPhone supports MPEG-4 files that are encoded with the following "code" or "languages":
Video formats supported: H.264 video, up to 1.5 Mbps, 640 by 480 pixels, 30 frames per second, Low-Complexity version of the H.264 Baseline Profile with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; H.264 video, up to 768 Kbps, 320 by 240 pixels, 30 frames per second, Baseline Profile up to Level 1.3 with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; MPEG-4 video, up to 2.5 Mbps, 640 by 480 pixels, 30 frames per second, Simple Profile with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats
That information is copied from this link:
http://www.apple.com/iphone/specs.html
Hope this helps,
Nathan C.