VoIP = Voice Over Internet Protocol.
When you use a VoIP device, your voice is broken up in to lots of little data packets, routed through the Internet and reassembled on the other end.
I'm sure you've all seen the commericals and banner ads for Vonage which is the major player in the VoIP market. Vonage has a calling plan that allows for unlimited calling in the U.S. and Canada for $25.00/month. They just announced last week that you can now call Italy, France, Spain, UK, and Ireland for free if you have the Unlimited calling plan.
Just days after Vonage announced thier plan, another VoIP player, Skype threw their hat in the ring and they are offering free calling from Skype to regular numberse in the U.S. and Canada for free for the rest of year. Previously, only calls to other Skype users were free and you had to pay for calls to numbers out of the Skype network.
Skype has pretty good quality but Vonage is better. Vonage uses an actual phone hooked to a VoIP ready device. In my experience with Vonage the quality was almost always just as good as a traditional land line.
Skype uses your PC to make the call so all you need is a mic and speakers. It's easy to use a Skype account from anywhere. There is an option to do that with Vonage, but it costs extra.
I'm not making a recommendation for either service really, I just want to demonstrate the unfettered competition in an almost entirely unregulated segment of communications. It will be interesting to see how the traditional telecoms deal with this "problem" from these young upstarts. My guess is that they will choose not to compete but they will attempt to use the government to drive these services out of business through excessive regulation. The major telecom companies don't want to compete, they're too big and bloated and they know they can't compete in an open market.