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In 1987, the IIS started to work on perceptual audio coding in the framework of the EUREKA project EU147, Digital Audio Broadcasting (DAB). In a joint cooperation with the University of Erlangen (Prof. Dieter Seitzer), the IIS finally devised a very powerful algorithm that is standardized as ISO-MPEG Audio Layer-3 (IS 11172-3 and IS 13818-3).

Without data reduction, digital audio signals typically consist of 16 bit samples recorded at a sampling rate more than twice the actual audio bandwidth.  So you end up with more than 1.400 Mbit to represent just one second of stereo music in CD quality. By using MPEG audio coding, you may shrink down the original sound data from a CD by a factor of 12, without losing sound quality. Factors of 24 and even more still maintain a sound quality that is significantly better than what you get by just reducing the sampling rate and the resolution of your samples. Basically, this is realized by perceptual coding techniques addressing the perception of sound waves by the human ear.

The MPEG-1 Layer 3 algorithm is based on a extremely complicated psycho-acoustic model. The model is based on the capability of eliminating those frequencies which the human ear is unable to decipher. Removing what is not heard therefore drastically lessens space depending on the type of audio being compressed. The MPEG compression algorithm can't be compared to ZIP because it destroys some audio parts which will never be recreated, that's why MP3 can reach high  quality - but never full CD quality audio.

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