You might have heard about VoIP (Voice over Internet Protocol). If you work in a big office, you may already be using VoIP without realizing it. Big companies are starting to realize they can run their communications infrastructure entirely over the Internet. It's all transparent. You just pick up the phone and you have dial tone. Same as always. Sound quality is the same as always. The only people who know the difference are the CFO who sees a dramatic drop in communication costs, and the IT department that has to deal with the technology side of VoIP. (By the way, you pronounce VoIP by quickly spelling out the letters. Nobody says, "Voype.")

However, this article is a guide for the person who wants to spend less on phone service for their home or small office. Even an office with as many as 10 people can use the new breed of "consumer" VoIP equipment to slash phone costs while adding features and increasing usability. But first, my usual disclaimer: I'm not trying to sell you anything. This ain't my day job. I'm never compensated by any of the companies I write about. As a matter of fact, I have friends in traditional telecomm companies who will be unhappy that I'm spreading the word about a potentially better alternative.

But VoIP wasn't always a better alternative. It actually got off to a rocky start about ten years ago – and earned a bad rap that no longer applies. Back then, VoIP was computer-to-computer, requiring headsets, complicated software installations, and "offline communication" to initiate a call: "Joe, is your headset plugged in and the software in receive mode?" Clearly, this was best suited to geek-to-geek conversations. Later, companies like Net2Phone allowed you to call from your PC to any regular phone at low cost. But anything short of real phone-to-phone is fatally flawed, and Net2Phone never gained major traction with that original service. Early sound quality was also a problem. Somebody once described it as, "Somewhere between walkie-talkie and broken walkie-talkie."

That's all changed. Now you just plug an inexpensive little black box, called an ATA (Analog Telephone Adapter), into your cable modem or DSL. Plug an ordinary wired or cordless telephone into the ATA and you've got dial tone. Dial any phone number in the U.S. or Canada and your call is free. International calls, even to Asia, are just a few pennies per minute. And the calls are clear and static-free – better than a cell phone. People on the other end won't know you're on VoIP unless you tell them. One thing that hasn't changed is cheap calling. Depending on plan and provider, total cost is just $10 to $35 a month. The service I'm using now, Vonage, (pronounced "Vonn-edge") charges $30 a month for unlimited local, regional, and domestic long distance. Best of all, included at no extra charge, are all the things your local Bell telephone company rips you off for: caller ID, voice mail, call forwarding, *69 call return, call waiting, 3-way calling, and more.

You can either get a new phone number or (in certain exchanges) transfer your existing phone number to VoIP. I'll have more to say about that later in this article. Since I have personal experience with Vonage, I'll focus on it now. There are a few extra-cost Vonage options you might want to consider. The first is a toll-free number. $4.99 a month gets you an 866 or 877 number and 100 incoming minutes. Additional minutes are 4.9 cents. The second option is fax service. For $9.99 a month extra, you get a separate, dedicated line to plug your fax machine into, with unlimited inbound and 250 minutes of outbound faxing. Having a separate fax number is SO much better than sharing a line with your regular phone. (I have yet to find a viable line-sharing setup. The fax machine either starts when you don't want it to – or doesn't when it should.) Plus, having phone/fax with the same phone number on your business card screams, "Small time operator." But now you've got me off on a rant… I hate faxes! It'll be a happy day when I won't have to send or receive them ever again. I get irritated when people say they're going to, "Fax me something." My standard reply is, "Why can't you email it?" Invariably, the reply is "I can't do that." Well, you can. Here's how: you go down to Staples or CompUSA and spend fifty bucks on a color scanner. Even the very cheapest scanners sold today have superb quality – and include easy to use software, which includes one-button emailing of the scanned document.

But despite my irritation… and the fact that faxing is so twenty-five years ago… the damn thing refuses to die. So we're stuck having to support business faxing. That means a phone line to receive faxes and the technology to send them – even for just a few a month. Six years ago, I cancelled my dedicated phone company fax line and started using a service called eFax. I'm still on eFax, even though I liked them a lot better when it was $9.95/month instead of the recent increase to $12.95/month. Regardless, that's still better than the $32 a month I used to pay Verizon. With eFax, you get a new "permanent" fax number in your area code. Faxes sent to this number are converted to graphics file attachments and emailed to you. If you travel with a laptop or smartphone as I do, the ability to receive faxes anywhere is a huge benefit. You can send faxes via eFax (through your computer) out to a regular fax machine, but they charge you extra (ten cents a page), and it's not super-convenient. That's why I still keep an old fax machine in my home office, set to "send only" mode and hooked up to my regular Vonage line (not the extra-cost second fax line option).

But enough on faxing. Back to VoIP. The reason that VoIP is so inexpensive is because it is efficient, from a technology point of view. Conventional telephony (think Lily Tomlin's Ernestine the operator character on Saturday Night Live) is like plugging two wires together. The computer equivalent of Ernestine connects you and the other party and you two monopolize that copper wire connection for as long as you stay on the line – even during awkward periods of silence. VoIP by contrast is a packet solution. It actually breaks your conversation into tagged packets of data, intermingles them with trillions of other packets zooming across the Internet, and reassembles them at the destination phone. Literally, a "Scotty, beam me up" situation.

This new-paradigm technology enables you to have innovative options Ernestine never dreamed of, like an additional phone number in virtually any area code you choose. So, for example, if you're a snowbird and travel to Florida each winter, your children and friends back in New York can call your "extra" 212 number and be instantly connected to your 561 Vonage phone. Or you could open a virtual office in San Francisco with a "local" 415 phone number. Of course, remote numbers aren't new. They've been available for decades from traditional wireline carriers – but the cost and complexity made them prohibitive for the casual uses I'm describing here. But here's something you've never been able to do before: take your phone line with you to a hotel room, remote office, or vacation home. You see, unlike a traditional wireline phone, your ATA *is* your phone line. Unplug it, toss it in your briefcase, and you're good to go. If your hotel room in Tokyo has broadband, plug in your ATA and your friends back in Swampbottom, Mississippi can call you for free. Bypass those ludicrous hotel phone charges. Talk 24/7 if you so desire. Are you starting to see how this will change everything?

Telecommunications is a $300 billion business in the US alone; possibly a trillion dollars worldwide. In the past four years, the Bell companies have lost 28 million local phone lines, as people drop wired service and use their cell phones more and more. Part of this attrition is also due to the cable companies, who are aggressively promoting their phone services (which use VoIP technology and provide many – but not all – of the features I've been talking about in this article), and offering attractive bundled packages including premium TV, broadband access, and telephony for under $100 per month.

Something new on the horizon, that could threaten the growth of cellular carriers, is wireless Internet calling. Major manufacturers like Motorola, HP, and NEC, are completing development of so called hybrid phones that can make VoIP calls using a local WiFi "hot-spot" (in the office or at Starbucks), and seamlessly switch over to the conventional cellular network when you walk out of WiFi range. But the cellular carriers appear to be embracing this new technology, with the expectation that it could finally displace wired phones entirely. I agree. Wouldn't it be nice to just have a single multi-purpose phone that would economically fulfill all your communication needs? It's still a way off though, as the first hybrid phones will be rather expensive and there will undoubtedly be early-adopter glitches.

But wired VoIP is ready for prime time, right now. According to research firm In-Stat/MDR, the number of consumer VoIP subscribers is expected to explode from only 600,000 today to 7.4 million in four years. Vonage alone has been signing up 25,000 lines a week through marketing partners and its own web site. Just this past week, both Staples and Office Depot started selling a Vonage kit in their stores nationwide. Still, you have to put this all in context. 172 million US homes use traditional phone lines, so this is all still just a blip. If you are interested in taking the "advanced course" on VoIP, I recommend starting with this WiKi (user-supported online encyclopedia) for up-to-the minute information.

VoIP is also enjoying a tax honeymoon right now. As you know, conventional wireline and cell service is heavily taxed. For example, on a Verizon "Basic Local Service" account, 31% of my most recent bill was for tax and FCC charges and surcharges. Cell is almost as bad. 20% of my Sprint bill pays for that nonsense and stealth tax. VoIP on the other hand is classified as a data service and is not subject to this padding. The wireline companies are protesting that treatment, but Congress will likely block individual states from imposing tax on VoIP, fearing that it will stifle innovation. This makes too much sense, so don't expect it to last long.

Now, that's a good lead-in to the next topic of discussion: whether to keep your existing phone number or not. First of all, I do not recommend VoIP as your only phone line. You must have at least a cell phone that works from your home, as an emergency backup. VoIP is more susceptible to outages than a traditional wired phone. A conventional corded phone gets its power from giant battery banks at the phone company central office. That's why your regular phone works even during a blackout. As a side note, even if you're not switching to VoIP, you shouldn't have a cordless handset as your only phone. When the power goes out, so does it. You can partially address this shortcoming by plugging your cable modem / DSL box and ATA into a cheap uninterruptible power supply. Even the smallest computer UPS will keep your network and phone alive for many hours if dedicated to that task. However, blackout or not, the cable system and DSL service are more prone to outages than the conventional wireline phone system. Also, TiVo and your burglar alarm dialer will only work with a wireline phone line. Finally, you probably won't be able to get a phone directory listing (White or Yellow Pages) on a VoIP account. That could be a problem, even if friends don't normally look you up, because many banks and delivery services do reverse lookups to verify your address.

So, you'll probably need to keep one existing phone line as a lifeline. It then makes sense to drop back to the minimum level of service, and use the existing phone for incoming calls and your VoIP for outbound. Some people like the idea of a fresh start, although notifying lots of people of a new phone number is a royal pain. However, if you transfer your prized phone number to a VoIP company, and that company goes out of business, your number may also go away. There is no formal process for recovering the number in that situation, but I don't think it's ever happened so this may be a moot point.

While losing your phone number may be a remote risk, there are other negatives worth mentioning. One is the reliability issue. You've probably had your computer lock-up on occasion. Once a great while, that might happen to your VoIP adapter. It's not a big deal. Just like your computer, you simply reboot it and everything works fine again. However, if you're not comfortable with the concept, maybe VoIP isn't the best choice for you.

The next issue is more serious. We take 911 emergency service for granted. When you call 911 from a wired phone, you don't have to give your location to the dispatcher. It's already on the computer screen at the station. Not so with most VoIP phones. Remember when I said you could take your ATA with you and use it from your hotel room? Well, if you clutch your chest and dial 911, then collapse on the floor, the ambulance may show up back at your house! Vonage has the best solution for this, but all the others are working on the 911 location problem, as well as the other issues I've raised so far.

There are a few other concerns, although I question how real they are. The first is snooping. In theory, it's easier to remotely wiretap VoIP than a wired phone line. We live in a world filled with black-hat hackers and other miscreants, and I'm sure they could find a way to listen in on your calls if they really, really wanted to. Personally, I'm not worried. However, if you're discussing something highly sensitive, and want to preserve secrecy, the lower the technology level the better. In order that would be: face-to-face, encrypted wireline phone, unencrypted wired phone, VoIP line, digital cordless, digital cellular, and finally analog cellular or cordless phone. The second concern is a "malicious attack" on your VoIP phone. While it hasn't happened yet, in theory, somebody might develop a virus or worm to attack your VoIP adapter. This does not keep me up at night.