Dolby Digital (AC-3) is Dolby’s third generation audio coding algorithm. It is a perceptual coding algorithm developed to allow the use of lower data rates with a minimum of perceived degration of sound quality.
This coder has been designed to take maximum advantage of human auditory masking in that it divides the audio spectrum of each channel into narrow frequency bands of different sizes optimized with respect to the frequency selectivity of human hearing. This makes it possible to sharply filter coding noise so that it is forced to stay very close in frequency to the frequency components of the audio signal being coded. By reducing or eliminating coding noise wherever there are no audio signals to mask it, the sound quality of the original signal can be subjectively preserved. In this key respect, a coding system like AC-3 is essentially a form of very selective and powerful noise reduction.