An MP3 file is made up of MP3 frames, which consist of a header and a data block. This sequence of frames is called an elementary stream. Due to the "bit reservoir", frames are not independent items and cannot usually be extracted on arbitrary frame boundaries. The MP3 Data blocks contain the (compressed) audio information in terms of frequencies and amplitudes. The diagram shows that the MP3 Header consists of a sync word, which is used to identify the beginning of a valid frame. This is followed by a bit indicating that this is the MPEG standard and two bits that indicate that layer 3 is used; hence MPEG-1 Audio Layer 3 or MP3. After this, the values will differ, depending on the MP3 file. ISO/IEC 11172-3 defines the range of values for each section of the header along with the specification of the header. Most MP3 files today contain ID3 metadata, which precedes or follows the MP3 frames, as noted in the diagram. The data stream can contain an optional checksum.

Joint stereo is done only on a frame-to-frame basis.
In short, MP3 compression works by reducing the accuracy of certain components of sound that are considered (by psychoacoustic analysis) to be beyond the hearing capabilities of most humans. This method is commonly referred to as perceptual coding or psychoacoustic modeling. The remaining audio information is then recorded in a space-efficient manner using MDCT and FFT algorithms.

The MP3 encoding algorithm is generally split into four parts. Part 1 divides the audio signal into smaller pieces, called frames, and an MDCT filter is then performed on the output. Part 2 passes the sample into a 1024-point fast Fourier transform (FFT), then the psychoacoustic model is applied and another MDCT filter is performed on the output. Part 3 quantifies and encodes each sample, known as noise allocation, which adjusts itself to meet the bit rate and sound masking requirements. Part 4 formats the bitstream, called an audio frame, which is made up of 4 parts, the header, error check, audio data, and ancillary data.

The MPEG-1 standard does not include a precise specification for an MP3 encoder but does provide examples of psychoacoustic models, rate loops, and the like in the non-normative part of the original standard. MPEG-2 doubles the number of sampling rates that are supported and MPEG-2.5 adds 3 more. When this was written, the suggested implementations were quite dated. Implementers of the standard were supposed to devise algorithms suitable for removing parts of the information from the audio input. As a result, many different MP3 encoders became available, each producing files of differing quality. Comparisons were widely a…

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The basic MP3 decoding and encoding technology is patent-free in the European Union, all patents having expired there by 2012 at the latest. In the United States, the technology became substantially patent-free on 16 April 2017 (see below). MP3 patents expired in the US between 2007 and 2017. In the past, many organizations have claimed ownership of patents related to MP3 decoding or encoding. These claims led to several legal threats and actions from a variety of sources. As a result, in countries that allow software patents, uncertainty about which patents must have been licensed to create MP3 products without committing patent infringement was common in the early stages of the technology's adoption.

The initial near-complete MPEG-1 standard (parts 1, 2, and 3) was publicly available on 6 December 1991 as ISO CD 11172. In most countries, patents cannot be filed after prior art has been made public, and patents expire 20 years after the initial filing date, which can be up to 12 months later for filings in other countries. As a result, patents required to implement MP3 expired in most countries by December 2012, 21 years after the publication of ISO CD 11172.

An exception is the United States, where patents in force but filed before 8 June 1995 expire after the later of 17 years from the issue date or 20 years from the priority date. A lengthy patent prosecution process may result in a patent issued much later than normally expected (see submarine patents). The various MP3-related patents expired on dates ranging from 2007 to 2017 in the United States. Patents for anything disclosed in ISO CD 11172 filed a year or more after its publication are questionable. If only the known MP3 patents filed by December 1992 are considered, then MP3 decoding has been patent-free in the US since 22 September 2015, when U.S. patent 5,812,672, which had a PCT filing in October 1992, expired. If the longest-running patent mentioned in the aforementioned references is taken as a measure, then the MP3 technology became patent-free in the United States on 16 April 2017, when U.S. patent 6,009,399, held and administered by Technicolor, expired. As a result, many free and open-source software projects, such as the Fedora operating system, have decided to start shipping MP3 support by default, and users will no longer have to resort to installing unofficial packages maintained by third party software repositories for MP3 playback or encoding.

Technicolor (formerly called Thomson Consumer Electronics) claimed to control MP3 licensing of the Layer 3 patents in many countries, including the United States, Japan, Canada, and EU countries. Technicolor had been actively enforcing these patents. MP3 license revenues from Technicolor's administration generated about €100 million for the Fraunhofer Society in 2005. In September 1998, the Fraunhofer Institute sent a letter to several developers of MP3 software stating that a license was required to "distribute and/or sell decoders and/or encoders". The letter claimed that unlicensed products "infringe the patent rights of Fraunhofer and Thomson. To make, sell or distribute products using the [MPEG Layer-3] standard and thus our patents, you need to obtain a license under these patents from us." This led to the situation where the LAME MP3 encoder project could not offer its users official binaries that could run on their computer. The project's position was that as source code, LAME was simply a description of how an MP3 encoder could b…

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Other lossy formats exist. Among these, Advanced Audio Coding (AAC) is the most widely used, and was designed to be the successor to MP3. There also exist other lossy formats such as mp3PRO and MP2. They are members of the same technological family as MP3 and depend on roughly similar psychoacoustic models and MDCT algorithms. Whereas MP3 uses a hybrid coding approach that is part MDCT and part FFT, AAC is purely MDCT, significantly improving compression efficiency. Many of the basic patents underlying these formats are held by Fraunhofer Society, Alcatel-Lucent, Thomson Consumer Electronics, Bell, Dolby, LG Electronics, NEC, NTT Docomo, Panasonic, Sony Corporation, ETRI, JVC Kenwood, Philips, Microsoft, and NTT.

When the digital audio player market was taking off, MP3 was widely adopted as the standard hence the popular name "MP3 player". Sony was an exception and used their own ATRAC codec taken from their MiniDisc format, which Sony claimed was better. Following criticism and lower than expected Walkman sales, in 2004 Sony for the first time introduced native MP3 support to its Walkman players.

There are also open compression formats like Opus and Vorbis that are available free of charge and without any known patent restrictions. Some of the newer audio compression formats, such as AAC, WMA Pro, Vorbis, and Opus, are free of some limitations inherent to the MP3 format that cannot be overcome by any MP3 encoder.

Besides lossy compression methods, lossless formats are a significant alternative to MP3 because they provide unaltered audio content, though with an increased file size compared to lossy compression. Lossless formats include FLAC (Free Lossless Audio Codec), Apple Lossless and many others.