Both AIFF and Apple lossless have the same resolution, they should sound the same. Since Apple lossless takes about half as much space. I would go with Apple lossless.
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With the iPod lineout to a Musical Fidelty X-CAN v3 I have not been able to tell the difference between 320kbps AAC and Apple Lossless. I encode everything in Apple Lossless now as it's basically a perfect copy of the original CD. I rarely use the iPod headphone jack except on 'planes.
One problem I think is to do with the size of the Apple Lossless files is that the iPod freezes every now and then (rendering it useless until the battery runs out). I think that because of the larger files the hard disk needs to be respun more often to refresh the buffer and this operation is error prone in bumpy situations like walking, running or on 'planes. It never freezes listening at work in the cradle.
Apple Lossless - no doubt! By the way: I just bought my first AND LAST CD (Brian Wilson "SMiLE") in iTunes store: the music is ACC encoded (!) and when I compared the download with the original CD - GEE was I shocked! ACC (or mp4 as they call it) might be OK for the car, or for listening while doing home chores but not for serious listening.
AAC is a general codec like MP3. It can compress the file size as much or as little as you like. At 320kbps, you are compressing at 4.4:1. At 256kbps, it's 5.5:1. At 128kbps, it's 11:1. It's your choice, if you're the one doing the encoding (e.g., if you're ripping from CDs with iTunes). If you download from the iTunes Music Store, you're getting 128kbps.
There will be a clear difference between CD and 128kbps AAC. You'd be hard-pressed to tell CD and 256kbps apart without knowing which was which unless you know exactly what to listen for.
As for Apple Lossless, Apple claims 2:1 compression, but the tests I've seen suggest that, on average, you don't get quite that much. A typical Apple Lossless file will be somewhat more than half the size of the original WAV or AIFF file.
Rsbeck: The same way data compression works with other computer files: zip, stuffit, whatever. You can compress a file on your computer, de-compress it, and get back the exact file, bit for bit. Apple Lossless works the same way.
That's distinct from "lossy" compression, like AAC and MP3, which aren't reversible. What you take out, you can't put back in. But if you start by taking out the things people can't hear anyway, and then move to the things that are very hard to hear or not very noticeable, the effect is relatively benign.
Thanks -- how many of you have had problems with an i-pod filled with lossless files jamming up? I've read where some claim an i-pod filled with AIFF files will jam up, but I haven't had that problem. If I can use lossless without jamming the i-pod, and if it is the same quality as AIFF, I will switch to lossless.