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As a small business owner, you may have heard of the term Voice Over IP or VOIP by now as an alternative or low cost telephone option. What is it? How does it work? Is it worth it? These are the questions. Here are some answers.

First, some background. With traditional telephones, a caller makes a call over a virtual switched connection from caller to called party over miles of cable and switching equipment until the connection is made. Once established, the connection is maintained for the length of the call. When either party hangs up, the virtual connection is torn down. The basic technology and principles have been around in various forms since telephones were invented.

VOIP technology has been maturing over the past 10 years when it first came on the scene as an alternative to traditional telephone switching. VOIP technology is derived from using the Internet as a communication transport system instead of the traditional telephone switch system. VOIP calls translate voices into digital packets, then send those packets over an IP network like the Internet until they reach a “gateway” to the traditional telephone system where they are translated back into voice signals and sent the last part of the journey on the normal telephone system to the called party.

What are the pros and cons of each method? Traditional phone call technology advantages include high quality sound. In a traditional phone call within the US, the circuits involved are typically 64kbps connections over telephone switching equipment and copper or fiber optic cables. Since the frequency required for conversational speaking is only about 9KHz, the sound quality is usually very good. Also, while the connection is established it is dedicated to the call; the quality of it doesn’t vary. The primary downside of traditional telephone calls now is the cost, especially overseas. Overseas calls are particularly expensive because many countries have high tariffs (taxes) placed on calls made to their country. Some governments are largely funded by these. When VOIP technology first came out, it was banned in many countries as a form of circumventing these taxes.

That brings us to the main advantage of VOIP, it is typically very cheap to make calls. This is particularly true of overseas calls. As an example, one popular VOIP company charges 6 cents a minute for calls to some of the most popular parts of China and the majority of calls to most overseas countries is well under one dollar a minute. In addition, many VOIP companies like Vonage have low cost calling plans where a flat fee of $20-25 per month gets you unlimited calling in the US and Canada. All you need is a broadband Internet connection. These are also typically month-to-month plans so it isn’t much of a commitment. Features like voicemail, call waiting, call forwarding, callerID, and 3-way calling are all available and included in $20-25 monthly plans. The large telephone companies are losing money on their traditional business and moving towards the VOIP model. ATT has a VOIP plan now.

So what’s the downside? With VOIP, of course you need a broadband internet connection; another monthly cost but one you might be paying anyway. Also, the quality of the call may not be that great. In most US calls, I’ve found the quality to be alright but not as good as traditional voice calls and sometimes downright bad. For overseas calls, where the savings are biggest, the odds are much worse that you’ll get a decent quality call. Why? The underlying IP technology wasn’t designed for real-time, low latency delivery the way that telephone virtual circuits are. IP technology is packet based so call bandwidth is being shared with Internet users and all the other traffic out there. There are some moves towards prioritizing which packets have higher priority but it isn’t really “there” yet.

The bottom line is that you should consider what you need and if it makes sense for you then try it. We make a lot of calls from Tucson to Phoenix in our business. These interstate calls are far more expensive than out-of-state long distance calls. Using VOIP cut down our monthly phone costs a lot, though voice quality sometimes suffered. For faxing, it’s probably a great idea because faxes are not as dependent on real-time data flow. In any case, at $20-25 per month and a month-to-month contract, it could be worth it to experiment.

Lee Le Clair is the CTO at Ephibian. His Tech Talk column appears the third week of each month in Inside Tucson Business