What Is VoIP? A Comprehensive Guide to How Business VoIP Works

Written by Margaret Joy

Voice over Internet Protocol (VoIP) describes digital calling over the Internet, and it's recommended for businesses that want to save on their phone bill.

VoIP Resources VoIP Fundamentals VoIP Glossary

Voice over Internet Protocol (VoIP) is one of those technologies that you use more often than you realize, even though you may never have heard the term before. Skype, Xbox Live, Ventrilo, Discord, Apple FaceTime—if you’re familiar with any of these, then you’re already familiar with VoIP. So what is it?

In short, VoIP is digital calling over the Internet. It’s even right in the name: Voice over IP. As the Internet developed and various protocols were introduced, multiple innovators realized they could use the new technology to send voice signals for free rather than relying entirely on landlines. Because VoIP uses packet switching instead of circuit switching like landlines (think switchboards and operators), the cost associated with traditional telephone companies is all but wiped out.

An easy way to wrap your head around VoIP is to think of it like this:

Traditional telephone lines: Analog
VoIP: Digital

Like vinyl to MP3 players or VHS to DVDs, VoIP is yet another digital version of established analog technologies. No need for copper wires to physically tether you to your desk, nor switchboards to translate analog voice signals. VoIP just needs the Internet to make calls.

VoIP technology is the digital upgrade for traditional phones.
VoIP is the digital upgrade for traditional phone lines.

VoIP technology mostly started to develop because gamers wanted the ability to talk in real time with each other, but who in their right mind would stay on a long-distance phone call for hours in the ‘90s?

“With VoIP, it’s possible to have real-time, live conversations with other gamers from all over the world without running up a huge phone bill.” –GetVoIP

A Brief History of VoIP

What is VoIP (VoIP-Timeline-1)
Click to enlarge

Internet calling has a longer life span than you might think. It roughly started in 1973 when ARPANET experimented with the first VoIP transmissions. Another big breakthrough came in 1991 with Speak Freely, the first VoIP app released into the public domain. It wasn’t until 1995, however, that the first real for-profit VoIP application came into play. Israeli telecom company VocalTec released their InternetPhone, and while it charged users for registration and minutes, the cost was minuscule compared to average call pricing at the time. Hosted PBX and SIP followed the next year, and then in 2003 came the biggest VoIP release in terms of public perception: Skype.

For any non-gamers (Xbox Live, which also uses VoIP, launched in 2002), free Internet calling was a phenomenon. Interest skyrocketed to the point that the FCC got involved in 2004. They declared VoIP an information service, not a telephone service. This meant that VoIP providers were not beholden to the higher taxes of telecom giants and were also free from state regulation, keeping VoIP costs incredibly low.

According to the FCC, VoIP is an information service, not a telephone service.
Skype signaled the start of the Internet video calling era.

Do you remember when the first iPhone came out? It seems like a lifetime ago. The first mobile VoIP app launched in 2006, only a year after the first WiFi-capable cell phone. In 2010, Steve Jobs introduced FaceTime, and daily VoIP video calls became the norm. Apple even allowed VoIP apps to work on their phones without announcing it. The next year saw the rise of WebRTC and the ability to use VoIP directly in browsers.

In 2001, VoIP calls didn’t even account for five percent of North American business calls. According to a Heavy Reading report, that number had jumped to 31 percent by 2011. Future Market Insights projects that in 2019, the VoIP industry will account for $86.2 billion dollars in revenue and 204.8 billion global subscribers.

How Does VoIP Work?

We mentioned earlier that VoIP uses packet switching to transmit data rather than the circuit switching method that regular phones utilize. Unless you’re an engineer, this probably looks like gibberish to you, so we’re going to briefly explain VoIP’s technical inner workings.

Circuit Switching Versus Packet Switching

Landline telephones—the ones with copper wires that can only handle one call per line—use circuit switching to send voice signals across wires. In the old days, when a switchboard operator connected two people on a call, that wire was entirely dedicated to that call and couldn’t be used for anything else, even if neither party was talking. Circuit switching looks like this:

This diagram shows a circuit-switched network.
In early telephone days, people sat at switchboards physically sending calls to the right destination. Image courtesy of Apposite Tech.

VoIP telephony uses packet switching instead. This is where the “IP” in VoIP comes into play. Unlike circuit switching, which reserves all the bandwidth of a single line in advance, packet switching is much more efficient because it only uses bandwidth when it’s needed.

Whether it’s an email, photo, or VoIP call, packet switching works the same way. The data (the call) going from Point A to Point B is broken up into little packages (packets). These packets bounce through routers (nodes) until they reach Point B. Each packet takes its own route, as each node it goes through looks at neighboring nodes to find the most efficient path—if one node is handling a lot of traffic, the packet will be sent to a node that isn’t so busy. This is called “store and forward.”

Each packet has a header with its source and destination information (IP address), like a piece of mail going through the postal service. Routers use the header information to figure out where to send the packet next. The packets also have ordering information, so no matter which packets of data arrive first, they are all reassembled into the correct order at the destination. This is why you might see a slowly loading picture appear one block at a time—you’re seeing the individual packets arriving and finding their correct place.

This diagram demonstrates a packet-switched network.

How packet switching sends data from Point A to Point B. Image courtesy of Apposite Tech.

This is how VoIP calls work. The voice data of the call is sent in little data packets across the Internet to the person on the other end. This might sound like a massive undertaking, but each packet comprises only a few milliseconds of sound, so lag or dropped packets due to a bad connection may be barely noticeable. Packet switching is more efficient than circuit switching and has better sound to boot.

SIP and SIP Addresses

You may be confused about the difference between SIP and VoIP. (Evolving Internet technology is lovely, but it does come with a staggering number of acronyms.) VoIP is calling over the Internet, while SIP is the protocol behind VoIP. Short for Session Initiation Protocol, SIP’s full name pretty much explains its function just like Voice over IP does.

SIP is VoIP’s signaling protocol—it’s what allows the call to actually connect and disconnect. Beyond that, SIP enables you to change the basic functions of a VoIP call in real time, like adding people to a conference or having one person hang up while the others stay on the line.

If the term “protocol” is throwing you off, let us bring you into some familiar territory. We’re positive you know HTTP, and you know SMTP by function if not necessarily by name. These are common communication protocols as well. HTTP is for the World Wide Web; it’s how your browser and the website you’re on communicate and exchange data. Without HTTP, hyperlinks wouldn’t work. SMTP is the protocol behind email and is quite similar to SIP.

HTTP is the protocol that allows a hyperlink to work; similarly, SIP is the protocol that allows VoIP to work.
Ever clicked on a hyperlink? HTTP is the protocol that allows it to work. SIP is the protocol that allows VoIP to work.

When you email someone, you type in their unique email address and assume your message will reach the correct inbox. It does so because SMTP routes your message to the right address.

You may have heard the term “SIP address.” SIP addresses typically look like email addresses, although they can be linked to telephone numbers as well so that people can easily dial and reach you. They are the unique identifier for each person using VoIP and the reason that you can answer a VoIP call from any device that’s connected with your SIP address. The reason you need a VoIP number in addition to a SIP address is so that you can receive calls from the PSTN, not just others using VoIP.

What Is a VoIP Number?

The terms “VoIP number” and “virtual phone number” are used fairly interchangeably in the digital telecom industry. Having a virtual phone number simply means that the number is not tied to a specific device. With landline phones, each number corresponds to a specific phone at a specific location. Cell phones function quite similarly—they might be mobile, but when you call your mother’s cell phone number, you know that call connects directly with her specific device. VoIP numbers, on the other hand, are associated with a particular individual rather than a device.

Think of your VoIP number like your email: As long as you have the credentials and an Internet-capable device, you can log in anywhere to send and receive messages. This geographic flexibility is what makes VoIP such an ideal business tool for employees who don’t stay at their desk all day.

VoIP softphones help keep employees connected no matter where they choose to work.
Prefer to work remotely? VoIP softphones keep you connected no matter where you are.  

Say you’re at a client site and your boss calls you. With traditional work numbers, you would have no clue your desk phone is ringing back at the office, and your poor boss would have to settle for voicemail.

Switching to VoIP doesn’t mean you have to give up your current business phone number: The FCC extended local number portability to VoIP back in 2007. The characteristics of a VoIP number are less in the specific digits and more about how you can connect it to various devices through cloud telephony.

What Is a VoIP Phone?

A VoIP phone looks just like a regular phone, but haven’t you ever heard you shouldn’t judge a book by its cover? VoIP phones ditch the landline wiring and bring in superior features and functionality. They often use Power over Ethernet (PoE), which means that an Ethernet cable plugged into the back of the unit both powers the device and connects it to the Internet. This is great for businesses because rather than having to get a whole office wired or adding lines for new hires, employees can just plug their phones in and hop on a call within minutes. Even better, once a phone is configured for VoIP you can take it anywhere, plug it back in, and it will work just the same.

Unlike landline phones, which can only have a single physical line associated with them, each VoIP phone can have several lines. There are a handful of definitions for “phone line”; in the context of landlines, it means the physical copper wire that connects to each phone and carries the analog voice signals of a phone call.

In the context of business VoIP, a single phone can handle multiple calls at once, reducing the number of lines needed (and the associated cost). On top of this, VoIP phones have HD voice, providing you with the crystal clear sound that the public switched telephone network (PSTN) can’t replicate. The Internet can handle much larger voice codecs than landlines, allowing for sharper, clearer sound, and even HD music on hold to keep waiting callers appeased.

Dialing VoIP Phone in an office.
If it looks like a phone, dials like a phone, but also sounds much better than a phone, it’s a VoIP phone.

You can even install a VoIP phone on your mobile device. Known as softphones, they’re simply apps that allow you to make and receive VoIP calls no matter where you are, without having to use your personal number or minutes. Softphones also come in desktop app or browser form, so you can choose the VoIP phone that best fits your work style.

What Is a VoIP Call?

A VoIP call is simply a phone call made over the Internet. It uses the technology outlined above to connect people in a more efficient, higher-quality, significantly less expensive way. As we’ll explain further below, VoIP has several benefits for businesses that handle lots of phone traffic or any business that requires phone lines and flexibility without seriously cutting into the budget. But when it comes to the call itself, VoIP calls function exactly the same as traditional telephone systems (just with better sound quality!).

What Is Fixed VoIP and Non-Fixed VoIP?

Fixed VoIP means the VoIP number is linked to a physical address. Back in landline-only days, you could only get a phone number if you provided a street address. This is how emergency services work—when you call 911, the dispatcher sees the address associated with the phone number, so she knows where to send first responders. While VoIP users may not always be at that particular location, fixed VoIP providers still require an address because it is an in-country service only. Fixed VoIP is usually associated with businesses or residences that have chosen to use a VoIP provider like OnSIP rather than a traditional telephone provider.

Fixed VoIP is more authentic and functions much like a traditional phone company’s service, complete with extensive business features and security protocols. Additionally, fixed VoIP can connect to the PSTN.

Old rotary phones.
Fixed VoIP has extensive business features, including the ability to connect to anyone no matter their phone system.

Non-fixed VoIP, on the other hand, doesn’t require a physical address to sign up. Consider non-fixed VoIP the “burner phone” of Internet telephony—you only have to provide an email address and payment. Anyone can get a VoIP number and make it look like they are calling from one country when they’re actually in another. While the ability to dial internationally is nice, there’s a much greater chance that a non-fixed VoIP number is a scam. It doesn’t include business-grade features, includes little to no security, and you can’t connect to the PSTN, including 911. Examples of non-fixed VoIP include Skype and Google Voice.

VoIP for Business: The Benefits

Once you start talking about the benefits of business VoIP, it’s difficult to know where to end. At least it’s easy to figure out where to start:

Cost

The most significant benefit of switching your business to a cloud-based phone system is by and large the expense. Traditional phone systems are expensive when you consider hardware, provider fees, installation, and actual per-minute costs. VoIP phones can handle multiple “lines” at once, can be installed in no time, and don’t cost nearly as much because the technology harnesses the wonderfully free power of the Internet. VoIP is an excellent choice for businesses that don’t want to spend inordinate amounts of money on their phone bill.

Scalability

As businesses grow and add employees, adding additional VoIP lines is extraordinarily simple. A landline phone system would require calling your provider, setting up a time for them to add lines to the office, and buying new hardware. With cloud-based phone systems like OnSIP, you can control everything from our online admin portal. As your business grows, moves, or changes in any way, you can make necessary adjustments on your own.  

Business VoIP is a great way to keep everyone connected with the same cloud phone system.
Who needs a new phone line? VoIP makes scaling your business easier than ever.

Flexibility

Adding a new office? Hiring remote employees? Business VoIP is a fantastic way to keep everyone connected with the same cloud phone system. Employees can choose how they like to conduct calls—whether from a traditional desk phone or from a softphone that follows them wherever they may be. Your phone system should work for you, not the other way around.

OnSIP: The Premium Business VoIP Provider

When it comes to finding the best VoIP provider for your business, you can’t do much better than OnSIP. Between our stellar sales and support teams, you can have your phone system set up and functional within an hour. No more waiting for a scheduled (and expensive) appointment with the phone company after playing endless phone tag. No wires threading through your office just begging for someone to trip. And no enormous phone bill!

OnSIP even patented a geographic redundancy system so that no matter what, our service is always up and running.

Read more about OnSIP’s business VoIP advantages here.