I don't really understand the differences in PCM or Bitstream tbh as evidenced, just gone with whatever worked depending on surround or stereo.
I looked on my B1 and it looks pretty limited. Auto or PCM via optical only appears to use Dolby Digital sadly. The options are in different menus strangely enough. There is an option for passthrough however, if Prime has any configurable sound options?
In its most basic interpretation, PCM is simply the digital version of analogue stereo. Since most of what we use for sources, displays and audio in TV/video systems is digital, then you can think of PCM Stereo as the universal base standard for audio across virtually all audio gear where there's a digital audio signal socket of some description. PCM is the "common language" if you will.
A.V. gear being what it is though, you won't be too surprised to learn that there's a little more to it. The digital stereo carries over a trick from the days of analogue video such as TV broadcast and VHS. It can accommodate an embedded basic surround signal known as Dolby Surround.
The trick with Dolby Surround is that the centre and surround channel info is buried in the stereo signal in a way that doesn't show up unless it's played through a Dolby ProLogic decoder. PCM then gives you stereo, and if the signal is encoded with it- and played via some suitable surround gear it can also give a reasonably effective surround effect too.
There is a limitation though with PCM as played through Optical or Digital Coaxial connections. These type of connections max out at stereo. They can't handle three or more channels of PCM.
Why would you want more channels? Although Dolby Surround (DS) is reasonably effective it's not as good as having dedicated channels for the centre (voice) and left and right surrounds (the original DS was mono rear channel and frequency-limited too), and there's no provision for a dedicated low frequency effects channel. All of these issues were addressed when Dolby Digital (DD) was invented.
DD has one audio channel for each of the five main ground channels - centre, front left, front right, surround left, surround right - and a separate channel called LFE (Low Frequency Effects) just for additional bass thump which goes below the lower limits of the bass carried by the main channels. The catch though is that this 5.1 signal can't be carried via Optical or Coaxial as a 6-channel PCM signal. There just isn't enough bandwidth.
What Dolby Labs did then was come up with a way of combining these six channels in to a single
stream of data
bits - a
bit stream - that could then fit the capacity of optical and coaxial. The signal would then be unpacked back in to 5.1 by a Dolby Digital decoder built in to an AV receiver.
Bitstream is how a Dolby Digital 5.1 signal gets from the Optical out of a TV to a piece of audio gear with the appropriate inputs and decoding tech. However, the bitstream signal doesn't necessarily have to be 5.1 surround. It can be anything from a mono (1 channel which is denoted as 1.0), or stereo (2.0) or almost any combination of the five main channels and LFE track.
The caveats with DD are that it is lossy and isn't backwards compatible with stereo-only audio devices.
This is why most TVs have the option of selecting PCM (only) or an Auto option. By selecting PCM you guarantee that the TV will always output the base standard stereo PCM signal regardless of how the source signal is formatted. Where the Auto or Bitstream option is chosen then the TV will pass either PCM or Bitstream according to what the source signal has. If the bit of audio gear doesn't understand Bitstream because it has no DD decoder then you won't get any sound.
Summary
TV setting: PCM - Guaranteed compatibility with any piece of audio gear with a digital audio input
TV setting: Auto - Signal will be passed 'as is' even if the piece of audio gear doesn't decode Dolby Digital
