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To oversimplfy a complex matter, AVI is not really a distribution format. So it's not the best option to produce a video file that looks good while keeping the file size/data rate low.
Formats like FLV (Flash video) and H264 (the advanced version of MPEG-4) are better candidates for this.
FLV is supported by the Flash plug-in and provides good quality at low data rates, and it's almost universally playable.
H264 has amazing quality, and is supported by Quicktime and also the most recent versions of Flash. Because of this, it's not as widespread and not the best option if you are concerned with having a file that anybody will be able to watch without installing anything.
After Effects is not a dedicated encoding application, but it can create both FLV and H264 files from the Render Queue. Make sure you pick a web preset to keep a small file size, and also pay attention to the comment field inside the format options dialog, which may instruct you to change the frame size in the Output Module (or it may fail to render the file).
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What am I doing wrong?
You are using AVI! Seriously, as mentioned, depending on your output target and the content used in your project, compression is an art in itself. Assuming you are only preparing stuff to be used for editing in another program, file size as such should be the least of your concerns. Titles and backgrounds can easily be converted to the target format by e.g. rendering the timeline in Premiere Pro or rendering a motion menu in Encore. Up to that point, your sole concern should be quality. A good balance between both can still be achieved by using Quicktime files with lossles compression such as Animation or PNG. If you're talking DVD, then naturally everything will end up as MPEG-2 in one way or the other, so it doesn't matter whether you directly render it from AE or let again e.g. Encore do the conversion. For desktop playback, H.264 offers good options, but if you are on Windows anyway, simply use WMV. For web, FLV is almost de facto a standard. The rest is, as they say, far out and far inbetween and you will have to provide more info on your specific needs as well as simply do some experimenting. There's a ton of encoding tools out there, free and commercial, and each of them takes time to master.
I realize that an AVI is not the best distribution package, but if I encode the AVI to an AVI using Media Encoder, the file size goes from 65 MB to 18 MB.
Is AE's encoder really that inefficient? (AE produced an FLV that was only 277K, so I will mark the question as answered, but I'd really like more information.)
Is AE's encoder really that inefficient?
The thing is, AVI doesn't mean much.
It's pretty much an empty container box, which doesn't imply a quality level.
So, AME could default to something completely different as a starting point to produce an AVI file.
AE defaults to uncompressed video when you pick AVI as a format. So, obviously this produces huge file sizes. There could be similar quality thresholds with smaller sizes if you pick other AVIcodecs, but that's a different subject. And in any case, when you're rendering a production quality master, file size is usually not your main concern. You typically use this high quality video file as a source for compressed flavors for distribution. So, pristine video files with huge sizes are a good thing - people then wonder why trailers at apple.com, for instance look so good. And the thing is, the most compressed formats benefit enormously from having an uncompressed file as a source.
Regarding encoding efficiency, yes, AE is less efficient than dedicated encoding solutions. Above all, because it doesn't support 2 pass encoding. Note that for some formats, 2 pass makes a night and day difference, while for others, nothing as drastic as most users seem to believe.
All of this is a moot point for AVI, because the default AVI codecs don't offer these encoding options, which are more the realm of distribution formats like FLV, MPEG-4/H264 or WMV.
There are distribution codecs which use AVI as a container out there, but those are a different case.
A simple question and look at the useless responses he gets. Just wants a usable output video file.
He asked what he was doing wrong and he was told, he's using AVI in AE, they suggested he use something better (although nothing is worse than AVI)
AE doesn't have a good compressor, which is why an AE tif sequence will be 5mb per image, whereas it'll be under 1mb through AME.