This is an old article, but a good read.
"First let's clarify some nomenclature. Dolby and DTS have both introduced new audio codecs. The lossy ones are DD+ (Dolby Digital Plus) and DTS-HD (High Definition). The lossless codecs are Dolby TrueHD and DTS-HD MA (Master Audio).
Everything a receiver does to the soundtrack, up to and including D/A conversion, requires the soundtrack to be in uncompressed PCM form. In fact, when you send your receiver a DD or DTS bitstream, the first thing it does is decompress the soundtrack to linear PCM. Only then can it apply things like bass management, time alignment, etc.
Just like editing the document requires unzipping the file first, doing any of this live-mixing to the soundtrack requires decoding it to linear PCM first. This is why it has to be done in the player. They're not going to transmit every option to your receiver, just one soundtrack. You choose what you want to hear, it is mixed in the player (i.e. the soundtrack you want to hear is literally built in real time inside the player) and transmitted as a final mix to your receiver.
Current HDMI allows 8 channels of 96/24 PCM to be transmitted (more than enough resolution for any soundtrack), but not the new codecs in their native form. When HDMI 1.3 arrives, it will allow the new codecs mentioned above to be transmitted in their native bitstream, but only if they were authored in 'Basic' mode (no interactivity). If the soundtrack was authored in Advanced mode, then it cannot be transmitted in undecoded form; decoding in the player is mandatory because of live mixing.
So far, all HD DVD soundtracks have been authored in Advanced mode. Which means nothing will change when new receivers arrive on the market. Despite having HDMI 1.3 transmission and decoders built into the receiver, decoding will still have to take place in the player.
Currently, Blu-ray discs are authored in Basic mode, since they haven't gotten interactivity yet. As soon as BD Java is up and working, they'll all be authored in Advanced mode too. At that point, what are the decoders in the receivers going to do? Decode the relatively few BD titles that were released before interactivity? Most of those titles will be re-issued anyway.
Personally, I'm glad that decoding is shifting to the player. I wish it had always been that way. Since receivers need the data in PCM form anyway, that's what every player should be outputting (irrespective of what format is used to store the data on the disc). As mentioned before, when new audio codecs and formats arrive, you'll have to buy a new player. But as long as the players keep outputting the audio in PCM form, current receivers will always remain compatible with anything that shows up in the future. How elegant is that!"