Question about decoding

[TheDreadPirate]

The client will always have to decode the video, period. However, depending on the client codec support, the server may also become involved.

Direct play = client fully supports the file as is, server simply sends the file
Direct stream = client supports video, but not audio. Server sends video unmodified, transcodes audio.
Transcode = client does not support video. Server transcodes video. Audio may or may not need to be transcoded.