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Standard telephone calls are made over the PSTN or ISDN networks. With VoIP calls, you don't need to make use of these lines. You simply need an internet connection. VoIP technology converts voice signals into 'packets', similar to an email and sends them out from the callers network address to the receiver via the internet. The cost savings are made because at least part of the call will miss going through a telephone exchange and therefore not incur associated charges such as call connections. If you are calling someone whose service is hosted in the same location as you, then you will completely bypass any telephone exchange and therefore the call is free.
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