A digital optical cable is used to transfer data, usually audio or video, from one source to another. Digital optical cables are typically more expensive than other types of cables, such as coaxial or composite, but are much more effective at reproducing a signal through the transfer.
DVD Players
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A digital optical cable can be used to transfer an audio signal from one component, like a DVD player, to another component, such as a receiver. Or, in some cases, an optical cable might be able to directly connect to a TV, assuming the TV had an optical port.
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CD Players
People who want high-quality sound from a CD player might attach it to a receiver with a digital optical cable. Because digital optical cables are ideal at replicating a signal, and hardly any data is lost in the transfer, they make great solutions for generating high-quality sound.
Portable Devices
Some portable devices, like a Sony MiniDisc player, are capable of transferring data to another component through a digital optical cable. So if you wanted to play music on a MiniDisc player through a digital receiver, you could connect the two components with a digital audio cable.
Surround Sound/Home Theater
Many high-quality surround sound/home theater systems use digital optical cables to connect a subwoofer to a receiver. This makes the sound quality coming through the subwoofer much higher than it would be if it was simply connected with speaker wire.
Game Consoles
Some of the more recently developed game consoles, like the PlayStation 3, connect to a television with a digital optical cable. This transfers the video and audio signal from the console to the television.