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Optical discs are shiny discs whose surfaces are not as smooth as they look. They have little microscopic pits in the surface, or some other irregularity, but it's on purpose (at least at first): the readers for these discs use lasers to translate the pits into data. If you've seen a toothed music box, a player piano, or a Fisher-Price toy record player with toy records, these work on the same principle, only on a much smaller scale.
The first optical disks were laserdiscs; this was an analog version, with all the advantages and disadvantages of not being digital. Unfortunately, they were too far ahead of their time, and sold poorly in a world that was still just getting used to VCRs. The technology, which was introduced by MCA DiscoVision in 1978, eventually ended up at Pioneer (where it was kept on life support well into the DVD era).
The first optical discs to actually catch on were Compact Discs (CDs for short). They were introduced in 1983, but didn't catch on until player prices came down around 1989. The writable versions showed up around 1990, but were far too expensive for anyone outside the CD mastering world to use until the first inexpensive PC writers came out around 1998.
Other important optical disc formats, in approximate order of introduction: DVDs (c. 1997, accepted instantly); Universal Media Discs, aka UMDs, the disc format of the Play Station Portable; HD-DVDs, invented approx. 2006, now used mostly for computers; and Blu-ray, also invented approx. 2006, the apparent winner of the hi-def movie disc format war (they became common around the end of 2009) and official PlayStation 3 disc format.
The MiniDisc, invented in 1989 or so, is an edge-case - it looks optical, or would if you broke it out of its casing, and it's read with a laser, but it's written with a magnet, so it's both this and a Magnetic Disk. There were also bigger, non-proprietary "magneto-optical" discs made for PCs and Macs, but they never caught on all that well and were doomed when the Zip drive and cheap CD-Rs came about in the late 1990s.
Optical discs are a cheap, effective, and reliable way to get big files from point A to point B. When the CD finally became popular for the first time, it was believed that they were nigh-indestructible; this was never quite true, but CDs themselves and their more advanced kin don't wear out from use like vinyl records, magnetic tapes, or films. (Their players do, but not the discs themselves.) These days, it costs almost nothing to print a CD or DVD (even the writable varieties); most of the cost of pre-recorded CDs and DVDs comes from the intellectual property. The dollar DVDs in dollar stores have public domain TV shows and films, and very little else.
Discs that can only be written on once but can be written on at home, called CD-Rs, use bursts of laser light, stronger than the normal laser, to burn dyes into light and dark spots. (If you don't keep your RW+ drive dusted, you will smell it happening.) This process also allows you to decorate the side you're not writing data on. RW+ discs, the ones that can be written on over and over, use the writing laser to modify a metal layer inside the disc, changing its "phase" from crystalline (which reflects light) to amorphous (which absorbs it), affecting the shininess enough to create "pits."
The most recent generation of discs - HD-DVDs and BluRays - can store tens of gigabytes on a single disc easily and reliably.
As of 2010, optical discs are the only economical way to sell high-quality digital music, video, and software in a large scale on a physical medium. Flash Memory cards can hold MP3s, photos, and small programs, but not CD-quality music, full-length movies, or videogames that are trying to look like full-length movies. Well, they could, technically do so, but given that the cost of a Flash card comparable to a Blu-ray disc in capacity is about ten times higher, this is hardly a sane thing to do, though with the recent drop in prices certain Flash Memory manufacturers like San Disk are testing the waters with digital music sales, which require less space and thus cheaper cards.
Optical discs are not without their faults. Their players rely on moving parts. The discs can skip if bumped, and they can be scratched; CD players deal with this with a memory buffer. If shaken too much, the mechanism in an optical disc player can fail; this makes CD players and DVD players in your car costly.
Fingerprints, oils, or minor scratches on an optical disc can cripple it, even if especially if the label side of the disc is scratched — the part of the CD that reflects the laser is directly under the label. All true CDs recorded before 1991 and all CD-Rs so far can get catastrophic failures if the dyes used to make them go bad or eat through the coating. (This problem was ironed out in pre-recorded discs by the time DVDs were invented.) Rewritable discs can be erased by the temperatures inside a closed car; other optical discs, left a bit longer inside such a car, just warp too much to fit comfortably into the disc player.
There is one other thing to keep in mind when we discuss optical media, and that is how the player handles the velocity of the disc. There are two methods:
Constant angular velocity, or CAV, means that the player always spins the disc at the same speed, just like a vinyl record player would. (Paul McCartney had his Run Devil Run CD labeled at 15,000 rpm.) On the plus side, it's easier to design a player that works that way, and the design is more reliable. On the minus side, you get a LOT of wasted space on the outer edges of the disc, as the head will travel faster over that section than the inner tracks. (Of course, less data on the edges means less data wrecked if you slip up while holding the disc by the edges....)
Constant linear velocity, or CLV, means that the player, instead of revolutions per minute, reads X pits per minute. Because the disk always travels the same linear rate under the laser, the disc can store more data in the outer edges. But it requires a spindle that can be spun at variable speeds - continuously variable speeds. Players designed for CLV discs can play CAV/rpm discs (and so every reader that a CD can fit in can play a CD); players designed for CAV/rpm discs usually don't play CLV discs because of the reliability factor - and fewer players often means less popularity.
CDs, DVDs and BluRay are all CLV formats on-disc, though most modern drives cheat a bit and use "zoned CAV" to make recording faster (optical drive controller hardware these days is smart enough to know how to adjust the bit rate to match). Laserdiscs could be found in either CAV or CLV forms; CLV discs couldn't do things like pause or search unless you had a more expensive player with "still store", whereas on CAV discs, the head could just hover in place like on a hard drive. Speaking of which, all hard drives are CAV, for the reasons stated above, and have been using the zoning trick for years to stuff more data in (modern drives can have dozens of zones). Floppy disks for the PC were CAV, but some other systems used CLV, sometimes for the same disks. For this reason, floppy disks had a slightly higher capacity when formatted for use with an Apple Macintosh or a Commodore 1541 drive. The cost of this was a markedly higher rate of drive failure.