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Ever since I got my Google Voice account, I have had to repeatedly explain to friends and colleagues what Google's free phone service is and (more importantly) what it isn't. If you, like them, have heard about Google Voice but still aren't completely clear about how it works and why you should care, here are some quick answers.

How it works

You can't just sign up for Google Voice: you need an invitation. To get one, you can go to the Google Voice invitation request page and fill out the form. Once you have Voice service on your Google account, you can invite others to join the service.
Once you have your Google Voice number, you can associate your other phone numbers--work, home, mobile, whatever--with it. You can still make calls from those handsets using your regular phone service; their individual numbers will show up on the receiver's caller ID screen. But you can also choose to have your Google number show up instead.

What it is

In addition to having one number that can reach all of your physical handsets, Google Voice offers some intelligent phone features that your existing handsets and services might not.
For starters, you can get intelligent call forwarding, by setting up rules for how you want your calls routed. You might, for example, want calls received before 5:00 pm sent to your office phone, calls after that to your cell phone; Google Voice can do that. You also get customizable ringing: Calls from some callers might ring only at home, while those from others would go straight to voicemail; you can schedule when those ringing rules take effect.
Google Voice also gives you a Web interface to your phones and services. Among other things, that means you can manage voice messages online, filing and archiving them much like Gmail. It allows you to customize greetings by caller and by group. You can also dial from any of your associated phones using a Web interface or helper program. If you have numbers in Google Contacts, Google Voice offers some powerful speed-dialing tools. (Google Contacts can be synced with OS X's Address Book and the iPhone.)
The service also allows you to record calls (after you've received permission from the other party, of course); it can automatically generate transcripts, too.
One final benefit: Google Voice offers cheap international calling and free SMS.
Note that Google recently introduced the ability to get some of these features on your existing numbers. But those features are awfully limited compared with what you get when you use a Google number.

What it isn't

Google Voice is not, however, the be-all and end-all of telephone services.
It isn't a Voice over IP (VoIP) service like Skype or Vonage. You still need a standard phone connection (cellular or landline) to and from Google Voice.
Nor is it fully integrated (yet) with the iPhone. As I write this, Apple does not allow Google Voice iPhone apps. There is however, a very good iPhone-optimized version of the Google Voice web application. Google's native Voice applications for Android and BlackBerry phones are very capable, and the federal government has expressed concern, so there is hope that Apple will approve a Google Voice iPhone app.

The bottom line

In many ways, Google Voice turns your "dumb" phones into smart phones. You can understand why cell phone vendors and carriers might not be too thrilled about it: the service allows Google to insinuate itself between you and your carrier, and provides free replacements for many of their premium services.

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