Audio Connection Type
Tools > Options > Video > Audio for Video, DVD, & Television > Connection Type
See also: Video Playback Options
Overview
Videos sometimes contain audio that is encoded. The encoded audio must be decoded at playback time.
For example, a DVD normally contains surround sound 5.1 audio encoded as a Dolby Digital (AC3) stream.
Some of these encoded formats can be optionally sent as-is to an external decoder. In this case, the external decoder (normally a receiver) does the decoding. This is called "bitstreaming". Bitstreaming is available for Dolby Digital (AC3), and DTS, Dolby TrueHD, and DTS-HD.
PCM
It is recommended that the computer be used to do all audio decoding. By allowing the computer to decode, you gain the ability to use the full range of audio processing offered by Media Center. This includes VideoClock, Room Correction, parametric equalization, normalization, and much more. This mode is called "PCM" (because PCM is the name of decoded audio data).
Bitstreaming
Media Center can optionally bitstream the formats listed above to an external receiver (or other outboard decoder). When bitstreaming, Media Center can not use VideoClock or any other audio processing.
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.) 4) You have properly configured the receiver levels, speakers, distances, etc.
Select 'Bitstreaming' as the connection type to use an external decoder when possible.