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This paper proposes a novel video compression scheme based on a highly flexible hierarchy of unit representation which includes three block concepts: coding unit (CU), prediction unit (PU), and transform unit (TU). This separation of the block structure into three different concepts allows each to be optimized according to its role; the CU is a macroblock-like unit which supports region splitting in a manner similar to a conventional quadtree, the PU supports nonsquare motion partition shapes for motion compensation, while the TU allows the transform size to be defined independently from the PU. Several other coding tools are extended to arbitrary unit size to maintain consistency with the proposed design, e.g., transform size is extended up to 64 × 64 and intraprediction is designed to support an arbitrary number of angles for variable block sizes. Other novel techniques such as a new noncascading interpolation Alter design allowing arbitrary motion accuracy and a leaky prediction technique using both open-loop and closed-loop predictors are also introduced. The video codec described in this paper was a candidate in the competitive phase of the high-efficiency video coding (HEVC) standardization work. Compared to H.264/AVC, it demonstrated bit rate reductions of around 40% based on objective measures and around 60% based on subjective testing with 1080 p sequences. It has been partially adopted into the first standardization model of the collaborative phase of the HEVC effort.