This is where you'll find most disagreements between audiophiles and gadget-heads. Lossless or lossy? High bitrate or low bitrate? Proprietary or open-source format? Users have dozens of format choices for storing their music.
MP3 is the most common format, and offers the most variety. An MP3 can be encoded at a variety of sampling rates, bit rates, and channels. A 4 minute and 20 second song (Mr. Jones by the Talking Heads, in this case) is only 1 MB if encoded at 22 kHz and 32 kbps in mono, but explodes to 9 MB when encoded at 48 kHz and 320 kbps in stereo.
Even at the highest quality and lowest compression settings, MP3s are always smaller than other, lossless formats. However, due to the very nature of MP3s and digital compression, they are also almost always inferior in audio quality. While the actual discernable difference is debatable at different settings, on a purely technical level MP3s have less information than lossless formats. They're "lossy," in that they compress and remove bits of audio information in order to save space.
One of the most popular lossless formats available is FLAC (Free Lossless Audio Codec). It's gained momentum as a universal, freely available format that doesn't use any sort of copy protection. As such, online high-definition music stores like HDTracks have embraced FLAC as a format option. Unfortunately, it can't be played on Windows Media Player or iTunes without going through some esoteric work-arounds. If you don't want to worry about juggling codecs and interface hacks, you'll have to use another media player like WinAmp to play FLAC files.
Windows Media Player and iTunes have their own proprietary lossless formats, Windows Media Audio (WMA) and Apple Lossless Codec (ALC). While they can be played with little to no trouble on their respective players, they aren't quite so flexible if you want to play them on anything else. If you're sticking with a specific set-up for lossless playback, either of these formats are functional choices that can be used with little hassle.
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