There is a guy here in Auckland who makes excellent music servers, and we have had a lot of discussion with him on the local boards about file formats, FLAC, compression, etc. He is very open and accessible, and shares his knowledge and helps people DIY their own servers, despite that it is a large part of his business. This is a quote from a recent post of his:
"The problem with lossless compression is that the rate of compression changes during the compression process as parts of the music file are found to be able to be compressed more than others. The different flac levels are about how much time it spends on the encoding, not about a certain compression rate. Therefore when streaming a compressed flac file the streaming rate of the flac file needs to slow down and speed up in an inverse relationship with the compression rate. By comparison the wav file can just be streamed at a constant rate since it is encoded at a constant rate. This is addressed by buffering of the streamed flac file at the point where it is unpacked. The effectiveness of the buffering determines how big a difference you will hear between a compressed lossless file and an uncompressed lossless file. So on one system you may find almost no discernable difference and on another find a very obvious difference - depending on the success of the buffering. To my hearing there is no such thing as buffering that eliminates jitter (or whatever you want to call distortion of a digital signal) other than storing the whole file before playing it back.
Three of us have just spent three days on and off doing various blind tests in the interests of music server design, and on one of those days did blind tests of different file formats. The first two days were a revelation with some shocks in terms of what sounded best, but the third day - testing file formats - was also interesting. This was done with me changing the files being played and my 'subject' (who has very discerning hearing - even though I do not quite share his tastes in how music should sound) never knew which file was being played.
In the blind tests I always had my back to him and he had no view of what was being played or any visual clues from me - unless the back of my head is more expressive than I appreciate. At no time did he ever perceive a difference between the uncompressed flac file and the wav file. But he always reliably stated a preference for the less compressed lossless files over the more compressed ones in comparing any two files. We used wav, uncompressed flac, flac level 0, flac level 5 and flac level 8 mostly, with a dalliance with AIFF and ALAC. The more compressed files (ed: higher flac level number) always sounded closed down compared to the less compressed files. I found it remarkable that there was utter consistency in the results, and a testament to the hearing of my subject that day - confirming why I like to use him for this stuff...
"I am not surprised that [uncompressed] AIFF is better than compressed FLAC, but on most machines uncompressed FLAC has been a little better than AIFF to my ears. WAV sounds a little better than AIFF for me but I can't hear any difference between WAV and uncompressed FLAC. When I say sounds better, the difference with such comparisons is usually a greater sense of ease and flow - the reduced sense of a silent scream."
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A friend of mine was a guitarist for a fairly well known English 80s alternative band, who had some very good successes and sold a fair few records WW. He then went on to start a studio/label with one of his band members, and has has some good successes and won awards with that. We have had a few discussions on this topic, andhe basically uses his car as his litmus test. He would mix in the studio, take it home listen (on his Audiofile-Fi) and it would be great. Then, he would listen in his car, and it would be rubbish. So, he got rid of his HiFi, got a MidFi and then it and his car would be his benchmark, along with the studio kit. He managed to make recordings that sound good on my SET + 604s as well, so I think they are doing something right.

