A codec (short for compressor/decompressor) is hardware or software that converts analog sound, speech or video to digital code and vice versa. Codecs must faithfully reproduce the original signal, but they must also compress the binary code to the smallest number of bits possible in order to transmit faster.

Software codecs are installed into audio and video editing programs as well as media players that download audio and video over the Web. Software codecs rely entirely on the PC for processing. Hardware codecs are specialized chips built into digital telephones and videoconferencing stations to maximize performance.

Just as when you create smaller files for easier storage and transmission, video codecs provide a smaller bandwidth stream to transmit images without noticeable loss. An incoming video signal comprises frames in a set resolution, transmitted at a set frame rate.

Every video codec works in essentially the same manner: They take an incoming video stream, compress the signal by deleting extraneous or duplicate information, and transmit it. At the receiving end, the codec decompresses the signal and displays it on the monitor or television. The primary separation between all codecs is how tight or how fast they can compress the stream. The trick is to find the balance between small files and real-time compression that gives the best quality.

Video codecs are typically classified as lossy or lossless. Typically, lossy means a visible loss of quality, whereas lossless defines an image with imperceptible loss. Truth be told, most video codecs are lossy to some extent. Because video quality is subjective, some amount of loss is acceptable without degrading the experience.