How does this thing tag the files to be compressed?

It tags them in the database; perhaps you should delete your database and see if that makes it start compressing. The database will be rebuilt when the player restarts -- you won't lose any information, as everything in the database is also in the metadata files on the disk (the so-called "*1" or "fid-1" files).

To delete the database, plug in a USB keyboard and press Ctrl-Alt-Del. Choose "shell" from the screen you then get.

At the Linux prompt, type rm /drive0/var/fiddb and press Return

Just to make sure compression is set up properly, type grep bitrate /drive0/var/config.ini and report back here what it says.

Then type exit to quit the shell. You should get an "Indexing files" message, or some such, as the player restarts.

If it still doesn't start compressing, report back here and we'll go to the next stage: actually examining your metadata files.

Peter