I used to sell the stuff when I worked in telecoms, so I know a little bit, but even I don't know exactly how it works.
Skype is actually just a brand name for a product called VOIP (voice over internet protocol). It basically allows you to make calls via the internet, free of charge if the other person is using the same service. It's dependant on the speed of your broadband connection, and at the moment can still be pretty problematic for the average user. Quite a few blue chip companies have started using it as their connection is spot on, but personally I wouldn't reccomend it for residential use. Price wise it costs more than most telecom providers to call a landline, until it really takes off it won't be worth having but it is the future & once the technology needed to support it improves I'd expect the telephone as we know it to become extinct.
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