Update: the DXTC patent expired on 2018-03-16, many distros enable this by default now.
S3TC (also known as DXTn or DXTC) is a patented lossy texture compression algorithm. See: https://en.wikipedia.org/wiki/S3TC for more detailed information. Many games use S3TC and if you use Wine to play games you definitely want to enable it if your graphics card supports it.
Because this algorithm was patented it is disabled by default on many Linux distributions.
To enable it you can install the library "libtxc" if your favorite OS has not installed it already.
For easy configuration you can install the optional utility DRIconf, which you can find at: http://dri.freedesktop.org/wiki/DriConf. DriConf can safely be removed after configuration.
Steps to enable it
# pacman -S libtxc_dxtn
# aptitude install libtxc-dxtn-s2tc0
Install driconf (optional):
# pacman -S driconf
# aptitude install driconf
Run driconf and enable S3TC: