When I started using Office 2007, it was a nice surprise to find that when I saved my docs as .docx, it actually occupied less space than a corresponding .doc. I expected it to be the other way round since the old formats were binary whereas the new formats are xml based.
I finally figured out why. A docx (or xlsx or any other office file) is actually a zip file. You can go change the extension to .zip and look at the contents. Pretty clever! Not only because it saves space but it enables a number of other scenarios.
Here’s a good read on it:-