The term audio codec has two meanings, both referring to something that encodes and decodes. The term codec is a combination of 'coder-decoder'.
In software, a codec is a computer program that compresses/decompresses digital audio data according to a given audio file format or streaming audio format. The object of a codec algorithm is to represent the high-fidelity audio signal with minimum number of bits while retaining the quality. This can effectively reduce the storage space and the bandwidth required for transmission of the stored audio file. Most codecs are implemented as libraries which interface to one or more multimedia players, such as QuickTime Player, XMMS, Winamp, VLC media player, MPlayer or Windows Media Player.
In hardware, the term "audio codec" refers to a single device that encodes analog audio as digital signals and decodes digital back into analog. In other words, it contains both an ADC and DAC running off the same clock. This is used in sound cards that support both audio in and out, for instance.
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