In simple terms, yep that's the jist of it. The SPDIF connection just passes on the 1' and 0's to an external DAC (digital to analogue converter) to convert. Take the Z5500's by Logitech, you can connect by either SPDIF or analogue, by using SPDIF you are using the speakers built in sound processing. Connecting with analogue, you are using whatever sound device the speakers are connected to. Sound card or onboard sound in a PC for eg. If someone owning the Z5500's has a sound card like a Xonar D2X, then the D2X will have better DAC than the Z5500's, so connecting with SPDIF, that is bypassing what the D2X is capable of. If someone was using onboard sound, say on an older motherboard, then the Z5500's will have better DAC. It would make sense to connect via SPDIF, assuming the motherboard has it. If not, then someone could buy a cheap sound card with SPDIF.