Maybe I am misunderstanding this. People are adamant that S/PDIF is 2-channel, but is what they really mean that it can only hand that much bandwidth? When you send AC-3 via TOSLINK is it actually in six channels of low bandwidth audio? Or is it sending six channels of audio squeezed into what would look like two channels of bad audio to a naive receiver?
S/PDIF can only handle two channels of uncompressed audio. (up to 24/96 officially, though some new hardware will do 24/192)
Multichannel audio via S/PDIF uses lossy compression to fit into a two-channel audio stream.
This audio stream would just be random noise if you played it back without first going through a Dolby/DTS decoder.
To have the computer output 5.1 over S/PDIF, it has to be encoded to Dolby or DTS.
This requires a soundcard which supports either Dolby Digital Live, or DTS Connect.
Media Center also has the option of doing software-based encoding to Dolby Digital 5.1 via the Output Format section.
I don't know what your source is for this 5.1 audio going
into loopback, but whatever player you are using, is decoding the Dolby/DTS stream (if there is one) to PCM for playback on your PC.
To output this over S/PDIF, it must be re-encoded as a Dolby/DTS stream.
There's no Dolby/DTS stream to pass-through, as the player has already decoded it before it reaches Media Center.
If Netflix has AC-3 I want it to send AC-3, not some downgraded mess or audio that is missing the dialog track.
Then the Netflix app has to output the bitstream to your sound card.
The app would be decoding the Dolby stream to PCM first if you were to pass it through Media Center. (or any other device)