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In digital signal processing, data compression, source coding, or bit-rate reduction involves encoding information using fewer bits than the original representation. Compression can be either lossy or lossless. Lossless compression reduces bits by identifying and eliminating statistical redundancy. The process of reducing the size of a data file is referred to as data compression. In the context of data transmission, it is called source coding (encoding done at the source of the data before it is stored or transmitted) in opposition to channel coding.

Compression is useful because it helps reduce resource usage, such as data storage space or transmission capacity. Because compressed data must be decompressed to use, this extra processing imposes computational or other costs through decompression; this situation is far from being a free lunch. Data compression is subject to a space–time complexity trade-off. For instance, a compression scheme for video may require expensive hardware for the video to be decompressed fast enough to be viewed as it is being decompressed, and the option to decompress the video in full before watching it may be inconvenient or require additional storage.

It is estimated that the total amount of data that is stored on the world’s storage devices could be further compressed with existing compression algorithms by a remaining average factor of 4.5:1. It is estimated that the combined technological capacity of the world to store information provides 1,300 exabytes of hardware digits in 2007, but when the corresponding content is optimally compressed, this only represents 295 exabytes of Shannon information.