Motion JPEG (MJPEG) - How it works

Motion JPEG uses a lossy form of intraframe compression based on the discrete cosine transform (DCT). This mathematical operation converts each frame/field of the video source from the time domain into the frequency domain (aka transform domain.) A perceptual model based loosely on the human psychovisual system discards high-frequency information, i.e. sharp transitions in intensity, and color hue. In the transform domain, the process of reducing information is called quantization. In laymen's terms, quantization is a method for optimally reducing a large number scale (with different occurrences of each number) into a smaller one, and the transform-domain is a convenient representation of the image because the high-frequency coefficients, which contribute less to the over picture than other coefficients, are characteristically small-values with high compressibility. The quantized coefficients are then sequenced and losslessly packed into the output bitstream. Nearly all software implementations of M-JPEG permit user control over the compression-ratio (as well as other optional parameters), allowing the user to trade off picture-quality for smaller file size. In embedded applications (such as miniDV, which uses a similar DCT-compression scheme), the parameters are pre-selected and fixed for the application.

IP Cameras
Many network-enabled cameras provide M-JPEG streams that network clients can connect to. Mozilla and Webkit-based browsers have native support for viewing these M-JPEG streams.
Some network-enabled cameras provide their own M-JPEG interfaces as part of the normal feature set. For cameras that don't provide this feature natively, a server can be used to transcode the camera pictures into an M-JPEG stream and then provide that stream to other network clients.

Client Software
Browsers such as Safari and Google Chrome stream M-JPEG natively. In Firefox, Bug 625012 severely limits its ability to stream M-JPEG. Other browsers, such as Internet Explorer can display M-JPEG streams with the help of external plugins. Cambozola is an applet that can show M-JPEG streams in Java-enabled browsers.

Source: Wikipedia