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Large external memory bandwidth requirement leads to increased system power dissipation and cost in video coding application. Majority of the external memory traffic in video encoder is due to reference data accesses. We describe a lossy reference frame compression technique that can be used in video coding with minimal impact on quality while significantly reducing power and bandwidth requirement. The low cost transformless compression technique uses lossy reference for motion estimation to reduce memory traffic, and lossless reference for motion compensation (MC) to avoid drift. Thus, it is compatible with all existing video standards. We calculate the quantization error bound and show that by storing quantization error separately, bandwidth overhead due to MC can be reduced significantly. The technique meets key requirements specific to the video encode application. 24-39% reduction in peak bandwidth and 23-31% reduction in total average power consumption are observed for IBBP sequences.