webcam and mpeg4...where does the compression take place?

Hello everyone

I'm new to webcams and the technology of compressing video streams. I want to purchase a webcam that will give me the best image quality over the Internet. I have read about MPEG4 & H.264, but I am confused. Do I have to purchase a webcam that does MPEG4 or does the compression take place in software like Yahoo IM or AOL IM??

Looking at the Quickcam orbit.

Thanks!