Digital Coaxial cable Wiki
Your Squeezebox has two digital outputs - a coaxial one and an optical one. Which should you use?
Coaxial digital refers to converting the digital S/PDIF signal to a voltage level and transmitting it electrically. Coaxial digital connectors are coloured orange. The cables look like conventional analog left/right RCA cables. However these cables have to have an impedance of 75 ohms.
What does that mean? It means you can use a cable specifically designed as a coaxial digital cable as it meets this specification. Analog video cables will also meet this specification, the plugs are usually coloured yellow. Regular audio cables whose connectors are usually coloured white and red may or may not work - they do not have to meet the 75-ohm criteria, although some do.
Optical digital refers to converting the digital S/PDIF signal to light and transmitting it through a fibre optic cable that conducts light. Specifically, the S/PDIF signal is used to modulate (vary the intensity) of a red LED. A light receiver on the other end receives the light and decodes the signal from it based on the light modulation. As long as the Squeezebox is powered there should always be a red light illuminated in the optical digital output, even when it's not playing any music. You should be able to see this light coming through the edges of the door of the Squeezebox's optical digital output, and if you insert an optical digital cable into this output, red light should come out the opposite end of the cable.
Since Toshiba developed this technology, you may see it referred to as "Toslink".
Optical digital jacks are squarish inset connectors covered by a small hinged door. The optical digital cable has a connector that pushes the door out of the way and locks in place. The end of the optical digital cable has a tiny lens that contacts the LED. Take great care not to scratch this lens! Many optical cables come with covers to protect the lens when the cable is not connected. Use these covers and do not lose them. Some covers even come attached to the cable.
Optical digital cables can be made internally out of glass or plastic. Glass is known to transmit light better and some state that this will lead to better sound. However the needs of S/PDIF are well-met by plastic cables since the demands of S/PDIF are quite modest for fibre optic technology. You may not hear any difference in your equipment. This is a subject of considerable controversy and if you feel this is important, you should do further research, ask questions or conduct listening tests.