For example, an MP3 encoded at a constant bitrate of 128 kbit/s would result in a file approximately 9% of the size of the original CD audio. Compared to CD-quality digital audio, MP3 compression can commonly achieve a 75 to 95% reduction in size. The remaining audio information is then recorded in a space-efficient manner, using MDCT and FFT algorithms. This method is commonly referred to as perceptual coding or as psychoacoustic modeling. MP3 compression works by reducing (or approximating) the accuracy of certain components of sound that are considered (by psychoacoustic analysis) to be beyond the hearing capabilities of most humans. With the advent of portable media players, a product category also including smartphones, MP3 support remains near-universal. The MP3 format soon became associated with controversies surrounding copyright infringement, music piracy, and the file ripping/ sharing services MP3.com and Napster, among others. The combination of small size and acceptable fidelity led to a boom in the distribution of music over the Internet in the mid- to late-1990s, with MP3 serving as an enabling technology at a time when bandwidth and storage were still at a premium. This allows a large reduction in file sizes when compared to uncompressed audio.

With regard to audio compression (the aspect of the standard most apparent to end-users, and for which it is best known), MP3 uses lossy data-compression to encode data using inexact approximations and the partial discarding of data. MP3 (or mp3) as a file format commonly designates files containing an elementary stream of MPEG-1 Audio or MPEG-2 Audio encoded data, without other complexities of the MP3 standard. A third version, known as MPEG 2.5 - extended to better support lower bit rates - is commonly implemented, but is not a recognized standard. Originally defined as the third audio format of the MPEG-1 standard, it was retained and further extended - defining additional bit-rates and support for more audio channels - as the third audio format of the subsequent MPEG-2 standard. MP3 (formally MPEG-1 Audio Layer III or MPEG-2 Audio Layer III) is a coding format for digital audio developed largely by the Fraunhofer Society in Germany, with support from other digital scientists in the US and elsewhere.

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