Mike Goldman originally wrote the challenge such that it calls for one file and one decompressor. However, when subsequently asked whether there can be multiple files, he agreed; thereby he was arguably duped. He didn't say "okay, but there will be a 256 byte size penalty per additional file", he just plainly agreed. This means that the original formula for adding the size of the solution applies: just the file sizes…
Nope, perfectly acceptable for Goldman to keep the $100. Craig tried to play a game of semantics, and lost because semantics let Goldman weasel out by pointing to O/S meta data. The challenge clearly, repeatedly, stated that Goldman would give $5000 to anyone who could compress a datafile such that the combined size of file and decompressor was smaller than the original datafile. Craig did not compress the data store…
In any case, no compression algorithm makes all inputs smaller. So, just because a data encoding doesn't make a particular input case smaller doesn't imply that it's not a compression algorithm.