A method of compression that sacrifices some data permanently to make the overall file size much shorter while attempting to preserve the most important data. It comes as a shock to people new to Digital Video to know that DVDs are actually under heavy compression. After using a lossy compression codec, there is no way to return to the exact source you had from your output file.
Lossy compression techniques are used in all DVDs, Blu-ray discs, and with CDs and most audio found on the internet. If it was not used, 8.5 GB DVDs would be hundred of GBs large and not available for commercial/mass use. There are however, downsides to lossy compression, which is of course the loss of data and compression artifacts. Loss of quality is very easy to find in JPEG or GIF images, or in encodes of DVD-video. Comparing CD quality lossless to compressed MP3 is night and day.
Examples of Lossy Compression
AVC/H.264- MPEG-4 Part 10, also known as MPEG-4 AVC (Advanced Video Coding), is actually defined in an identical pair of standards maintained by different organizations, together known as the Joint Video Team (JVT). While MPEG-4 Part 10 is a ISO/IEC standard, it was developed in cooperation with the ITU, an organization heavily involved in broadcast television standards. Since the ITU designation for the standard is H.264, you may see MPEG-4 Part 10 video referred to as either AVC or H.264. Both are valid, and refer to the same standard.
MPEG-2- A video standard developed by MPEG group. MPEG-2 is not a successor for MPEG-1, but an addition instead -- both of these formats have their own purposes in life; MPEG-1 is meant for medium-bandwidth usage and MPEG-2 is meant for high-bandwidth/broadband usage. Most commonly MPEG-2 is used in digital TVs, DVD-Videos and in SVCDs. Some Blu-ray films have MPEG-2 transfers but not many as there are better lossy compression formats such as VC-1 or MPEG-4 AVC.
OGG Theora- Ogg Theora is a project under Ogg umbrella and was released in June, 2003. It is a project that aims to integrate On2's VP3 video codec, Ogg Vorbis audio codec and OGM multimedia container formats into a multimedia solution that can compete with MPEG-4 format. OGG Theora is open source and free.
MPEG-4- MPEG-4 is one of the latest (audio and video) compression method standardized by MPEG group, designed specially for low-bandwidth (less than 1.5MBit/sec bitrate) video/audio encoding purposes.
AAC- Advanced Audio Coding, or AAC, is a MPEG (Motion Pictures Experts Group) audio standard first adopted as part of the MPEG-2 family of standards. Like its predecessor, MP3, AAC is a Lossy Compression format capable of delivering relatively high quality at relatively low bitrates. There are actually two AAC specifications. In addition to the MPEG-2 version of AAC, which was also referred to early on as NBC for Non Backwards Compatible, there's a newer specification developed for MPEG-4. This version is normally found in the MP4 Container, either with or without accompanying video.
AC3/Dolby Digital- Dolby Digital (AC-3) is Dolby's third generation audio coding algorithm. It is a perceptual coding algorithm developed to allow the use of lower data rates with a minimum of perceived degration of sound quality.
MP3- MP3 stands for MPEG-1 Audio Layer III. It is not a separate format, but a part of MPEG-1 video encoding format, developed by MPEG group in early 1990's. Too often people refer MP3 as MPEG-3, which is incorrect, because such format doesn't even exist. MPEG-1 Audio Layer III (MP3) is a method to store good quality audio into small files by using psychoacoustics in order to get rid of the data from the audio that most of the humans can't hear.
OGG Vorbis- Vorbis is a lossy compression, meaning that audio data is physically removed from the stream and cannot be recovered afterwards, the same type of compression used by MP3.
WMA- WMA stands for Windows Media Audio. A proprietary audio format owned by Microsoft, part of Microsoft's Windows Media technology.