The existing Public Switched Telephone Network (PSTN) is usually represented in a picture like this:
The connection between the COs around the world inside of the PSTN cloud has long since been converted from analog to digital. There's just too much information being sent to leave it all in analog format. Instead, the voice energy on the line is sampled, turned into 1s and 0s and sent as data via a protocol called Signaling System 7 (SS7). Once the data reaches the CO on the other end of the connection, the data is turned back into voice and sent down the final mile of the local loop.
To Modulate or Not To Modulate? That Is The Question.
The word modem stands for modulation-demodulation. Modulation happens when digital data is translated into analog signals for your POTS phone line. Demodulation happens on the receiving side to translate the analog signals back into digital data. Modem speeds have continued to rise over the years because engineers at the phone company (AT&T mostly - the phone company) have found ways to increase the speed of the modulation-demodulation process.
The irony is that because the PSTN cloud is now digital, the local CO must turn the modulated data back into bits before sending it to the remote CO. The remote CO must then turn it back into an analog signal, send it down the line to the modem which then demodulates it back into bits. It's no wonder modern modems have so many fancy error correction protocols.
So, why have the AT&T engineers been spending all their time making modems faster? Shouldn't they be replacing the analog local loop and saving all of the unnecessary translating back and forth between analog and digital? Unfortunately, it's currently cheaper for them to leave the existing copper wire then to replace it with fiber optic cabling. Maybe the cable company can help...
ISDN is an international standard with two major flavors, BRI-ISDN (Basic Rate Interface) and PRI-ISDN (Primate Rate Interface). BRI-ISDN consists of 2B+D - two bearer channels and one data channel. Each bearer channel is for data up to 64 Kbps (kilobits per second), including voice, fax, video, network packets, et cetera. Combined, the two B-channels can provide up to 128 Kbps, more than four times as much as the 28.8 Kbps analog modem. In addition, the D-channel can provide 16Kbps, but is usually used only for call-related information, e.g. announcing a new call, placing a new call, et cetera. BRI-ISDN is great for a small business or a well-wired home. It's fairly well supported by computer and phone manufacturers and is relatively inexpensive (at least when compared to other options). For larger businesses, and more money, PRI-ISDN provides 23B+D.
POTS provides the capability to answer and receive a call and more recently has provided for Caller-ID. However, to be able to transfer a call, put a call on hold or place a call with more than one other participant - a conference call - you're going to need more than POTS. Most COs provide an additional set of advanced call control capabilities grouped together into a service called Centrex. This service extends the advanced functionality found on larger business phone lines to your home or small business. By providing these features on its own switch equipment, the CO can often provide them more cheaply and more easily than having your own switch.
A switch provides the brains of any phone connection. If you've picked up a phone and you hear a dial tone, that's the switches signal that it's ready to do your bidding. With POTS, ISDN and Centrex, the switch is located at the CO. However, if you'd like, you can have your own switch. Owning your own switch means that you control it completely. If you'd like an analog connection between your switch and the phones it supports, you're going to be using a Key System. A Key System is very much like having your own personal Centrex. However, because it's analog, and typically doesn't support many phones, a Key System is fairly limited. If, instead, you'd like a digital connection between the switch and the phones it supports, and you'd like to support more phones, you want a PBX (Private Branch eXchange). Because a PBX is digital, it's more flexible and more full-featured.
Each of the switches involved in any of the types of telephone networks I've mentioned is - surprise, surprise - a computer. These computers typically have a closed architecture, which means that the only one who can add features or fix bugs is the manufacturer of the switch. However, the features provided by switches are limited by the fact that they are implemented on proprietary computers. Other companies are beginning to realize this and provide switches based on general purpose computers, i.e. PCs.
Using standard interfaces for hardware and software, switches can be controlled via network protocols of all kinds. This includes traditional telephone networks like POTS, ISDN and Centrex as well as PC networks using protocols like TCP/IP (the language of the Internet) and IPX/SPX (the protocol used by Novell's Netware product). The software programming standard that makes all of these protocols available for telephony applications under Windows is TAPI, the Telephony Application Programming Interface.