Net phone services are the future. Here’s a primer on the technology, the potential savings, and trade-offs

Just a few years ago, only tech geeks and a few hobbyists made phone calls over the Internet. Now, Net telephony is starting to find widespread acceptance among consumers and corporate customers alike. The technology is taking off despite its clumsy name: VoIP, short for voice over Internet protocol. The U. S. alone already has 500,000 residential users, and that market could grow to 16.5 million by 2008, according to analyst Jon Arnold of consultant Frost & Sullivan.

It’s easy to see the appeal. Internet phone service is cheaper than the traditional kind, and it’s packed with new features, like the ability to listen to your voice mail on the Web, regardless of where you are. So should everyone turn their broadband connection into a phone line? Not necessarily. BusinessWeek Online Technology Editor Alex Salkever offers a quick primer on what you need to know about VoIP and making phone calls over the Internet.

Q: So what’s VoIP?
A: It’s a way of taking your voice, breaking it down into tiny little bits of data, and sending it over the Internet to another location. At that location, the bits are reassembled back into your voice. Your voice is treated like any other piece of Internet data, such as a Web page or audio file, distributed over the Net. While traditional calls require a separate circuit for each user, Internet calls share space on the network with everyone else. That’s vastly more efficient than traditional phone technology.

Q: Great, how do I use it?
A: In the old telecom world, a phone was a phone. Now a phone can take many forms. It can be a «hard» device that looks like an old-style phone but has innards adapted to work on broadband networks. Or a VoIP phone can be a «soft» phone, or software program that turns your PC into a phone. Most folks like to use a headset with a microphone to get better call quality on soft phones.

Q: Funny, I thought I read about this stuff four years ago.
A: You did. A bunch of companies were selling phone service over the Internet or giving it away during the era of the dot-com bubble. But the service quality was poor because the software was crude and Internet connections were slow.

Nonetheless, some independent startups were spawned, and now the big telcos and cable outfits are jumping in. The players will either generate profits or wrap VoIP into other offerings. So the technology isn’t going to go away.

Q: Why should I care about this?
A: Internet phone services are taking off now for a number of reasons. Most important, faster connections have improved quality and reliability. Nearly 30 million households, or 25% of the U.S. total, will have broadband by yearend, according to Patrick Mahoney of researcher Yankee Group.

Second, big telecom and cable outfits are aggressively pushing the technology as a way to bypass the Bells’ hammerlock on home dial tone. And self-installation is now so simple even technophobes can do it themselves. Anyone who’s capable of operating a DVD player is capable of going to a retailer like Best Buy (BBY ), purchasing an Internet phone, and plugging it into a broadband connection.

Q: Come on, is it really that easy?
A: You do have to go through several steps and a fairly simple testing procedure to make sure the system runs well. And people with home routers might face additional challenges with VoIP. These routers can mask IP addresses and make setting up VoIP more difficult. Finally, some Apple (AAPL ) computer users say they have particular trouble getting VoIP to work on their machines if they’re also using Apple’s wireless broadband routers. With these exceptions, most people shouldn’t find it that hard.

Q: How much money will I save?
A: A lot. One well known VoIP provider, the Lingo service offered by Primus, is offering a $19.95-a-month plan that includes unlimited talk time on all local and domestic long-distance calls as well as calls to Canada and Western Europe.

Even the VoIP plans offered by big cable operators, long-distance providers such as AT&T (T ), and the larger upstarts such as Vonage undercut the cost of traditional phone plans by as much as 50%. Skype Technologies is offering a VoIP service that allows any Skype user to talk to any other user of the service over the Net for free, using a PC or phone-like device.

Skype is free because it relies on the bandwidth supplied by its users to build an ad hoc peer-to-peer phone network. Skype users pay a per-minute charge to place calls to regular phones.

Q: Besides the savings, are there any other reasons I would want to do this?
A: Yes. Because calls are directed to an IP address instead of a specific physical location, VoIP providers can perform lots of nifty tricks that are much harder to do with regular phone service. For example, most basic VoIP packages include a feature that lets you receive your voice mail as e-mail messages. And you can plug the phone in to any broadband connection, and calls will automatically forward to the phone without you having to set up a new call-forwarding number.

Q: So what’s the downside?
A: While it has improved considerably, the quality of Internet calls remains inferior to regular phone service -- typically somewhere between a cell-phone call and a regular landline call. Also, you need a battery backup system to protect your connection in case of a power outage. Regular phones can run off the small amount of electricity that phone companies transmit over twisted-copper phone wires. VoIP phones require more juice and are often connected to DSL lines or coaxial lines used by cable companies, which don’t have their own source of power.

Then, there’s the 911 problem. While many VoIP providers do offer 911 service, it is tied to the subscriber’s location. So if you take your phone on a business trip and call for an ambulance at your hotel, the 911 dispatcher will still send help to your home if you don’t provide the right info.

Finally, you might face more service outages than you would like. Providers are trying to confine operation outages to the early morning hours, but they do have to shut down their VoIP systems for major software upgrades from time to time.

Q: I just got an offer from my local Bell for an unlimited calling plan that includes local and domestic calling, and doesn’t cost that much more than the Internet calling plan the cable guys are offering.
A: The growing competition from VoIP probably had a role in that offer. The technology has put price pressure on all the Baby Bells, and they have responded by creating bundles that include local, long-distance, and even cell-phone service. In some cases, the $10 monthly difference in price may not make it worthwhile to jump to VoIP service. That’s particularly true if the phone line you would be replacing with VoIP is your primary phone line.

Q: But I’ll have a choice, right? So is this really the future of phone calls?
A: Yes, in all probability it is. Most big carriers already use the Internet or its technology to carry a big portion of their phone calls, even though you wouldn’t know it because the calls start and end on the traditional phone network. Cell-phone handset makers are starting to build in systems that would let you use VoIP to talk for free over public Wi-Fi connections as well as over regular cellular networks.

It’s all part of a big trend to make voice calling just another service provided over an Internet connection. And since future phone service won’t depend on a dedicated phone network, the telecom world will be forever altered. The old one was about connecting places. The new one is about connecting people.

Edited by Steve Rosenbush