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Video codecs are used in DVD and video CD players and recorders, video broadcast systems, personal computers, and a variety of other applications. In particular, they are widely used in applications that record or transmit video, which may not be feasible with the high data volumes and bandwidths of uncompressed video.
Here's a simple rundown of what codec packs are and when you should use them. Note: This post really applies to Windows only. Mac users have a codec pack called Perian which works great, and is useful if you want to watch videos in QuickTime or iTunes rather than VLC.