Compression

Data compression is the process of encoding information to reduce the number of bits as compared to the uncompressed version of the information. A compression process will reduce the disk space required to store the information, and bandwidth required to transmit information.
          Compression can be lossless or lossy. Video Compression used in security applications is lossy compression, meaning once the original video information is compressed it can never be decompressed to restore all of the original information. In lossy compression, if information is compressed then decompressed then recompressed and so on, more and more information will be lost with each successive compression.
Video information lends itself well to lossy compression techniques. The reason being, there is a significant amount of data the human eye does not perceive in the uncompressed version of the video or image. Image and video compression takes advantage of this fact.
          Specifically the human visual system perceives brightness more readily than color. If you have ever compared LCD televisions, you may have noticed displays with higher contrast ratios look better. The contrast ratio is the difference from the brightest white to the darkest black that can be displayed on the set. Since our visual system perceives differences in brightness more than color the effect is a more appealing display, which is the same effect JPEG compression takes advantage of.

Lossy and Lossless

Lossless and lossy compression are terms that describe whether or not, in the compression of a file, all original data can be recovered when the file is uncompressed. With lossless compression, every single bit of data that was originally in the file remains after the file is uncompressed. All of the information is completely restored. This is generally the technique of choice for text or spreadsheet files, where losing words or financial data could pose a problem. The Graphics Interchange File (GIF) is an image format used on the Web that provides lossless compression.
          On the other hand, lossy compression reduces a file by permanently eliminating certain information, especially redundant information. When the file is uncompressed, only a part of the original information is still there (although the user may not notice it). Lossy compression is generally used for video and sound, where a certain amount of information loss will not be detected by most users.

http://www.salientsys.com/files/whitepaper/Understanding%20H%20264.pdf

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http://searchcio-midmarket.techtarget.com/definition/lossless-and-lossy-compression