Q: What is a codec?

Answer. A codec is software that is used to compress or decompress a digital media file, such as a song or video. Content creators use codecs because a compressed file takes up less storage space on your computer and can be transferred across the Internet more quickly and smoothly. When you play a digital media file, Windows Media Player uses a codec to decompress the file. Codecs are used to create and play nearly all music or video files on your computer or on Web sites.

A codec can consist of two components—an encoder and a decoder. The encoder compresses a file during creation, and the decoder decompresses the file so that it can be played. Some codecs include both components, while other codecs only include one. For example, if you install a DVD playback program on your computer, the program will likely install a codec that only includes an MPEG-2 decoder, which allows you to play the DVD on your computer. You would not be able to use the decoder to create your own DVD.

This answer applies to Windows Media Player 10 & 11 and may also apply to previous versions of Windows Media Player

Source: Microsoft.com