In 1987, the Fraunhofer 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 Fraunhofer 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 (e.g. 44.1 kHz for Compact Discs). 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.