Wave audio (.WAV) is responsible for all sound, except DVD and CD-ROM, which is stored digitally on your computer. Up to the advent of audio compression, high-quality digital audio data took a lot of hard disk space to store (or channel bandwidth to transmit). If you wanted to download this over the Internet, it would take several minutes.

Digital audio coding (digital audio compression) is the art of minimizing storage space (or channel bandwidth) requirements for audio data. Modern perceptual audio coding techniques (like MPEG Layer-3) exploit the properties of the human ear (the perception of sound) to achieve a size reduction by a certain factor with little or no perceptible loss of quality.
 
MPEG: The Moving Picture Experts Group is the name for a set of standards for the compression and playback of digital audio and video. MP3, or MPEG Audio Layer 3, is one of these standards.