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I have a rather large (>25GB) music collection, and my iPhone is currently almost full.

I just saw this option in iTunes:

enter image description here

This would probably be very useful to me, but I'm concerned about sound quality at such a low bitrate. Is it possible to change it to at least 160kbps from the default 128kbps?

Also, if I check the box, will the conversion occur on the fly (i.e., seamlessly while copying songs to the iPhone), or will iTunes basically create copies of all my songs in 128kbps AAC (thus causing to take up a lot of space on my Mac)?

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As far as I know iTunes does not offer any other options for bit-rate conversion. This conversion does indeed happen on-the-fly, as you sync your iPhone with iTunes, which makes the syncing take longer but saves space, so you have not to worry for duplicates on your mac.

If space is an issue and you have some spare $25 I also recommend you give a look to iTunes Match: it will allow you to store your music on the Cloud, so you can download the songs as you listen to them thus you have not your huge iTunes library sitting on your iPhone but it still is available when you need it.

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iTunes will convert the music on the fly. It takes a little time to add a large number of new songs.

I don't know of any way to change the bitrate when using this feature.

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I just found out that starting with the latest update to iTunes (10.6 (40)), it is now possible to choose another bitrate.

Once you update, you will be able to pick a bitrate between 128 kbps, 192 kbps, and 256 kbps:

itunes screenshot showing the 128/192/256 kbps choices

Music will be converted on the fly (without creating additional copies on the computer).

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There is a severe chance that your headphones won't be capable of producing sound so well that bit rate will make a noticeable difference

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    Even with the stock headset I notice a difference. If you plug in better headphones you'll notice a big difference in clarity. And remember: Using stock headphones on your music player is like driving you sports car with compact spare tires. – bot47 Feb 18 '12 at 8:22

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