Compression is the process in which a file or folder's size is reduced by using an algorithm to encode the same information using fewer bits.
Many video and audio codecs use compression to save bandwidth. Also, compression can be used to help save disk space, such as by packaging files inside a tarball or .zip folder. Compressed data needs to be decompressed by the appropriate algorithm before it can be used.
For an in-depth look at what compression is, read more on Wikipedia.