Example 1: You're playing a long video and want to record just portions of it. For example, let's say you stop the video after the first 10 minutes and then advance the seek bar to the next point at 25 minutes. When the file is played back Windows Media will see a time gap of 15 minutes and it will freeze the picture and sound during all this time. Compressing the time will eliminate this gap.

Example 2: You're recording a stream that has multiple interruptions (gaps) where no data is coming (do not confuse this with buffering time). The compress time will eliminate the wasted time and cut off the gaps.