Previous to the most recent Apple TV and Apple TV plex app updates, I was able to play files using direct play that had a DTS stream. If the first two audio streams were matching AAC and AC3 streams and I selected either of those, the Apple TV would play the AC3 stream. It would sometimes also allow me to see and select any other AAC or AC3 streams the file might have, but would not list the DTS stream. I could tell that it was using direct play because I got correct seeking thumbnails which I would not get if it were using direct stream or re-encoding instead. If I were to select the DTS stream, it would switch to streaming the video and re-encoding the audio.
Now when I have direct play enabled if I try to play the same file it gives a spinner for a few seconds, then immediately moves to the new up next screen. After a great deal of testing, I realized that if I turn off direct play or select an unsupported audio stream to force re-encoding of the audio, the file will play fine.
This is an OK temporary solution, but it isn't as good as direct play because the thumbnails provided for chapters are often incorrect. (This is another issue, in and of itself. I can't seem to get the server to reliably associate the correct auto-generated thumbnails and seek previews with the right video. Sometimes it gets it right. Sometimes it pulls from another video entirely. Even when it pulls from the correct video it will often chose a black frame for the chapter thumbnail whereas the Apple TV's native version will smartly pull a nearby frame with content.) Further it provides no seek thumbnail, instead showing a thumbnail of the current frame as you scan ahead, making it difficult to find a location in the video.
I realize this may be a problem with Apple's software. Perhaps they changed something in their native player that used to tolerate an unrecognized stream but now throws an error. But it would be great if a future update could restore the old behavior.