What Is IP Telephony? How Does It Work?

November 29, 2023 6 min read

Alex Doan

Alex Doan

What Is IP Telephony?

For decades, traditional landline phones relied on circuit-switched networks to make calls. But in recent years, Internet Protocol (IP) telephony has taken over voice communications.

By transmitting voice conversations over data networks rather than traditional phone lines, IP telephony systems enable unified communications that integrate voice, video, messaging, fax, conferencing, and more at a much lower cost.

The global IP phone market is valued at over $20 billion and is expected to grow steadily in the coming years. Businesses need to step up and use this emerging tech to their advantage.

To get you up to speed, we’ll discuss what IP telephony is, how it works, and how you can use it to improve customer communications.

What Is IP Telephony?

IP telephony (Internet Protocol Telephony) refers to any phone system that uses an internet connection to send and receive voice data.

Unlike a regular telephone that uses landlines to transmit analog signals, IP phones connect to the internet via a router and modem.

An example showing how IP telephony works
Diagram: An example showing how IP telephony works.

The first publicly available IP phone arrived on the market as early as 1995. But, compared to a standard phone system, it had low audio quality and was prohibitively expensive.

Since then, internet-based phone technology has improved by leaps and bounds. IP telephony now offers HD voice quality, cheaper running costs, and advanced business phone features.

And the need for up-front investment is next to nothing.

IP telephony doesn’t stop at voice calls. Here are some more of its use cases.

How Does IP Telephony Work?

IP telephone systems use the Internet Protocol — the fundamental data communication protocol of the Internet and modern networks — or other digital protocols to transfer voice communications over the internet.

IP telephony digitizes analog voice signals into data packets that are then transmitted using the Internet Protocol. As data packets traverse networks, they encounter devices such as routers that read packet headers and forward them to their destinations.

The major protocols that enable IP telephony include SIP (Session Initiation Protocol) for signaling and call session management, RTP(Real-Time Transport Protocol)/RTCP (Real-Time Transport Control Protocol) for transmitting voice media streams, and H.323 (call control and signaling protocol), an early VoIP protocol.

When packets complete their journey, the software reassembles them in the correct order to reconstruct the voice stream.

If you use an IP PBX system, the data is transferred digitally on a Local Area Network (LAN), and then transformed to analog voice signals and sent to the Public Switched Telephone Network (PSTN).

However, because of high hardware and installation costs, IP PBX is no longer the leading solution.

Hosted VoIP has become the most popular IP telephony solution. It lets businesses take advantage of advanced PBX features without hardware installed on-site.

Here’s a breakdown of how the VoIP system works: 

How a VoIP phone system works

With hosted VoIP, your IP phone sends data (in the form of digital signals) over the internet to your provider. Your provider handles the routing of calls, call queues, and everything else in the cloud.

You can also use SIP trunking to connect a legacy IP PBX to a modern VoIP provider to take advantage of missing features.

IP Telephony vs. VoIP

IP and VoIP telephony are often used interchangeably, but there’s a subtle difference between them.

IP telephony is a broader term that covers any telecommunications system using the Internet Protocol to transmit voice and data. This includes traditional phone systems that have been upgraded to use IP, as well as newer VoIP systems.

Voice over IP (VoIP), on the other hand, is a specific technology that uses IP to transmit voice calls. It’s a subset of IP telephony that specifically deals with the transmission of voice traffic.

In other words, all VoIP systems are IP telephony systems, but not all IP telephony systems are VoIP systems.

The term VoIP was initially more specific. It only referred to the technology used to make and receive phone calls over the internet.

In recent years, though, even VoIP providers and telecommunications companies have started to use these terms interchangeably. IP telephony and VoIP technology both cover phone systems that use a LAN (local area network) to connect to the internet via a modem/router.

Key Components of IP Telephony Systems

IP telephony systems comprise several key components that work together to facilitate voice communications over IP networks. These include:

Protocols play the most important role in IP telephony. Which protocols IP telephony uses depends on how your phone system is set up and your VoIP provider.

To effectively send voice data over the internet, you need a way to compress and decompress it. Because phones stream data in real-time and the focus is on human voices, they can’t use general codecs like MP3.

Most IP telephony service providers, including Nextiva, use the specialized G.711μ codec — the same as the new digitized PSTN.

Benefits of IP Telephony

More software buyers go with VoIP phones than any other type of voice service.

Why are so many businesses making the switch? 

1. Reduced costs

VoIP is significantly cheaper than traditional business plans. Switching to an unlimited VoIP plan can save you up to 50% over a comparable business landline plan.

Nextiva Essential, for instance, starts at $18.95/month per user and includes unlimited calling for the US and Canada.

Consolidating voice and data networks saves businesses long-distance and international call charges.

2. More features without extra hardware

IP telephony offers access to advanced features like advanced call routing, call recording, instant messaging, and video conferencing without having to invest in extra hardware.

Nextiva lets you choose advanced enterprise plans that include all key VoIP features. Businesses can also upgrade and enrich their plans with different add-ons or add more users as they grow. This makes IP telephony highly scalable.

Nextiva voip phone service

3. Increased accessibility

With IP telephony you can make and receive calls from anywhere in the world as long as you have an internet connection.

Users can make and receive calls from their computers, mobile phones, or any device with a softphone or VoIP app installed. This mobility is particularly valuable for businesses with remote or mobile employees.

4. Unified communications

VoIP also makes it a lot easier to integrate voice communications with your CRM and other business tools.

A snapshot of Nextiva's communication software

Centralizing data and providing consistent customer service across multiple channels (at a lower pricing) makes IP telephony and VoIP a no-brainer for many businesses.

Challenges With IP Telephony

Quality of Service (QoS): VoIP calls can be susceptible to network jitter and latency. This can lead to choppy audio, dropped calls, and other issues. Make sure you have sufficient bandwidth and a reliable internet connection to support VoIP.

How data packets flow
When packets arrive at unexpected times, VoIP calls can be interrupted.

Security: VoIP calls can be intercepted and eavesdropped on if not properly secured. Implement encryption and authentication measures to protect your calls.

Compatibility: VoIP systems may not be compatible with all existing telephone devices. Investing in the right VoIP phone service that can connect your existing systems via SIP trunks is key to switching to IP telephony.

Reliability: VoIP systems rely on the internet. VoIP calls may be interrupted by power outages or other internet outages. Make sure to have a backup plan in place if the VoIP system fails.

Although IP telephony can present its own challenges, you can easily get around the common issues. It all starts with choosing a VoIP service that understands your needs, has a reliable and scalable system, and offers excellent technical support.

Get Nextiva VoIP service. Simple. Affordable.

Get your business phone, messages, video meetings, contact management and notes–integrated in ONE powerful app.

Save Big on Monthly Bills by Switching To VoIP

Want significant cost savings and a new and more multi-line phone system with advanced PBX features?

Nextiva offers tailored solutions to businesses of all sizes. Our small business VoIP starts at $18.95/month per user.

For companies that require unified communications, more advanced features, and dedicated support, our enterprise plans start at $31.95/month per user.

Our Amazing Service Team will be with you every step of the way and ensure that the switch to VoIP is seamless.

Ready to make the switch to IP telephony? Speak to a Nextiva expert for an all-in communications solution.

Alex Doan


Alex Doan

Alex Doan is an experienced senior marketing professional specializing in propelling growth for both B2B and B2C companies. Proficient in streamlining marketing operations for seamless sales transitions, utilizing analytics and consumer insights to achieve measurable outcomes. Committed to enhancing lead and customer experiences through effective journey mapping.

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