Audio Connection Type
Tools > Options > Video > Audio for Video, DVD, & Television > Connection Type
See also: Video Playback Options
Overview
Many videos contain audio that is in an encoded format. For example, a DVD normally contains surround sound 5.1 audio encoded as a Dolby Digital (AC3) stream. To play a video with encoded audio, something must first decode the audio.
PCM
It is recommended that you allow your computer to decode the encoded audio. A computer has excellent decoding abilities. By allowing the computer to decode, you gain the ability to use the full range of audio processing offered by Media Center. This includes processing like VideoClock, Room Correction, parametric equalization, normalization, and much more.
Select 'PCM' as the connection type to use your computer to do decoding.
Bitstreaming
Media Center can optionally bitstream the audio inside a video to an external receiver (or other outboard decoder). When bitstreaming, Media Center can not analyze, room correct, equalize, mix, or do any other processing of the audio.
Only consider bitstreaming if ALL of the following are true: 1) You have at least 5.1 speakers connected 2) You are using an HDMI or S/PDIF connection 3) You have a receiver (or outboard decoder) capable of decoding formats like Dolby Digital and DTS (and preferably the latest formats like Dolby TrueHD, etc.)
Select 'Bitstreaming' as the connection type to use an external decoder when possible.