(Warning - This message is boringly technical. It tries to give an overview of some of the issues involved in ADSL & telephone lines, as well as how many French ISPs offer free French & International phone calls. Please be warned!)
Steve - The two options you describe are how it works in many countries. In France, however, the phone line option, your option 2, does not require the user to rent a phone line. The subscription to an Internet service provider (ISP or FAI in French) includes the use of the copper pair of wires from your house to the telephone exchange. These wires are not connected to the 'legacy" 'analogue telephone network at the exchange. You cannot therefore dial out using a traditional 'analogue' phone using these wires nor can you receive calls.
The wires can, however, carry large amounts of data, at quite high speed, but the laws of physics mean that the shorter the cable, the higher the speed and volume of data that can be carried. This data can include all sorts of 'stuff' including tiny parts of phone calls.
Information is carried to & fro over the link in small 'packets' These packets are in a digital format, and carry additional information which allows them to be to be checked, and, if some small transmission error had crept in, reconstituted correctly, without pausing. (There is also a mechanism which calls for them to be re-sent in the case of more serious errors, with a set of checks and double-checks in order to be sure that what goes forwards is identical to that which had been sent.) This is the basis of almost all 'digital' communication, whether it's ADSL, Digital TV or radio (DAB), satellite communication or whatever, as well as CDs & DVDs.
Such 'packets' of data are what are sent & received whenever you send or read e-mails, browse the web, or whatever. VOIP, (Voice over Internet Protocol) of which Skype is an example, is simply the use of these packets to carry the sounds of people's voices across the Internet, as what we term a 'telephone call'. When we use Skype, or a similar service, we would never have a problem if the packets making up our call didn't ever get delayed or lost along the way. In the real world, that actually happens, at which point we might hit problems hearing the other party, or suffer from distortion, or some other problem arises.
Many French ISPs actually build a kind of Skype system into their boxes (aka. routers) so that an old-fashioned (analogue) telephone can plug into the box & actually make phone calls simply by dialing the required number. The ISP organizes the connection of this call to the public network and, as distinct from a Skype call, ensures that the packets that make up the call get priority over other kinds of Internet packets in order to minimize their chance of getting lost or delayed. It is then a commercial decision to make such calls free to landlines in France and other countries, whilst charging a profitable rate for calls to mobiles & high cost countries like Egypt, most of Africa & so on.
In essence, all that is required is for the Internet router/box to contain the necessary software and hardware to convert telephone calls into data packets (& vice-versa) and to manage setting-up a new call & responding appropriately to an incoming call. Whilst this might be a gross simplification of what happens, it is happening millions of times per day all over France as we speak. The users appear to like it, even if they rarely make international calls, and its a godsend for us expats.