To reduce the size of a file by encoding the data. For example, if the file contains five letter As next to each other, which takes up five bytes of space, the compression software could encode this to 5A which takes two bytes of space. The compression software uses all sorts of encoding tricks to code the way data is stored to reduce the space it takes. Software is normally used to compress a file or all the data on a disk drive, but don't forget that decompression software is needed when you want to read the data again.
