File compression, also known as data reduction is a process used to reduce the size of a stereo or multichannel audio file. A smaller, compressed file reduces the amount of storage space required making it possible to store more music or video on a portable music player or hard drive and files can be transferred more quickly via the Internet or between storage devices. File compression can be lossy or lossless.
Lossy: Lossy compression is a data reduction method that reduces the amount of data during the coding process, but retains enough information to be useful. For example, an MP3 file is a lossy music file that discards some of the original data but is still acceptable for music listening. The advantage of lossy compression is that the music file takes much less storage space.
Lossless: Lossless compression data reduction methods also reduce file size, but retain all of the original data or music. Lossless compression is used where the quality of the compressed music file is critical. Another example of lossless compression is data or text where all of the information must be retained for accuracy. DTS-HD and Dolby True HD are two examples of lossless compression.