Unlocking and Rooting. They're two words that we throw around all the time, and sometimes it seems like they're used as synonyms. They aren't the same thing, but it's not hard to see why there may be some confusion. Let's tackle unlocking first, since that's what usually comes first in the process.
What is Unlocking?
When we're talking about "unlocking and rooting" your phone or tablet, the "unlocking" part has to do with unlocking the bootloader. If you don't remember, we talked about the bootloader in our last episode of Android Power User. If you haven't guessed, the bootloader comes locked right out of the box. Locking a bootloader is similar to locking your house. Once it's locked you can't get into it without a key. It keeps bad guys from just walking in and taking all your stuff. Unfortunately, the OEMs don't give you that key, and you can still get "into" parts of your phone or tablet. That's where the metaphor breaks down.
If your bootloader is locked you can't replace your recovery image, you can't flash a custom ROM, and you can't edit your system files. To many users, this is just fine. To others it's not.
To be able to remove pre-loaded bloatware, install a "current" version of the operating system by way of a custom ROM, or even to install some specialized apps, you've generally got to unlock your bootloader to start the process.
Some OEM's provide a way for you to unlock the bootloader using a tool you can download from their website. Other's won't let you unlock "their" phones at all. In that case the development community usually bands together to figure out how to exploit a security vulnerability and unlock the bootloader anyway.
What is Rooting?
After your device has been unlocked it's possible for you to Root it. Rooting is the process of allowing you to run your device with root-level permissions. Additionally, when we talk about Root we generally include Superuser permissions and various tools that assist with power user type activities.
Depending on your device it may not be necessary to unlock your bootloader before you root it. In other cases it's a must.
Once Rooted it's possible for you (or a malicious program) to replace pre-installed apps, modify or replace system files, and do all sorts of low-level stuff. For example, this is how many apps allowed us access to the LED flash as a flashlight before Google exposed an API for us. Root is how we were able to tether on carriers that wanted us to tether their way — or not at all. Ironically, root is what allows us to backup our files and our devices, so if something happens we can quickly and easily recover.
Most custom ROMs come pre-rooted, others do not. Recently, the CyanogenMod team has mused about the day when they'll be able to run everything they do in their ROM without requiring Root. The way this can be accomplished is through more robust and complete APIs — application programming interfaces — so that one program can talk to another program with regular user-level permissions, and without having to have root. Maybe someday that will happen, but for now, some of us need root.
Oh, and how about that link where you can turn your Nexus 7 into a phone? Here it is: Make And Receive Free Voice Calls With Your Android Tablet.