May Have Found the Problem...
I know this thread is a couple months old, but I'm not sure if anyone has found the solution... in case anyone stumbles upon this thread like I did from a Google search... the way I remedied my sound distortion/over-modulation issue (primarily iTunes Match music) was by disabling (turning off) Sound Check and Sound Effects. For 3rd Gen Apple TV this is located under Settings > Audio & Video > Sound Check, Sound Effects (clicking the middle button on your remote will toggle them "Off".
To give you some background of my Apple TV setup:
- Apple TV 3rd Gen
- Audio Output via HDMI to my TV (My TV audio out to my receiver is via a fiber optic audio cable to my receiver)
- I was primarily experiencing the audio distortion/over-modulation of iTunes Match Music
- I verified that my MP3 Source files were not the issue because they sound fine in all other platforms (through my iPod on my car stereo, on my Macbook Pro through iTunes, on my PC, etc.)
So I'm noticing with the Apple TV settings I mentioned above toggled "off" seemed to solve my problem. The only "problem" that you may experience with Sound Check toggled off is your music (through iTunes Match) will vary in volume output, but if you have professionally recorded music tracks then this shouldn't be too much of an issue.
I hope this may solve someone's audio issue with Apple TV, especially the music lovers who have a large collection in iTunes Match.
All My Best,
Nate