The Fraunhofer Institute, credited with the development of the seminal MP3 coding algorithms, was showing off their new MPEG Surround format on the show floor at CES.
MPEG Surround allows for multi-channel audio to be compressed into a stereo stream that is fully backwards compatible with existing receivers. The encoding process creates a stereo downmix of the a 5.1 or 7.2 source that includes a metadata stream that describes to the decoder how to fold back out the surround channels. This results in a very low bit-rate representation of high quality, multi-channel signals perfect for Internet broadcasting. They played several demos that sounded as good as one can expect on the show floor and also had a prototype MPEG Surround iPod Dock with an optical output.
Looks promising for the future of surround audio for Web distribution.