It may surprise you to learn that the core technology behind the phones didn’t change until recently and even the phones you use now may look different from the original phones, but the underlying mechanism is practically identical – a microphone on each side of the call turns on. The voice signal is a changing electrical current that is sent through the phone line and then used to reproduce the voice at the other end of the phone with a small speaker.
The new technology called Voice Over Internet Protocol means that voice is digitally sampled on the phone, converted into small “packets” of data that look a lot like packets containing other things such as web pages or MP3s downloaded and sent over Internet. The other end of the call receives these packets and reconstitutes them into a sound signal that we can listen to.
This may not seem like a major advance, but it radically changes the kinds of features that are possible with phone systems, and it also makes phone calls over the Internet dramatically cheaper than traditional methods. VOIP phones can have many additional features, such as browsing a phone book or even video calls that science fiction had been predicting for decades. VOIP phones may look like normal phones, but they are essentially a small computer that is a node unto itself on the Internet.
This can allow you to make calls virtually anywhere in the world at a much lower cost than traditional long distance phone service providers.