Thank you so much! I changed my Playstation to PCM and variable volume output now works. In the process I found out that the Xbox will not output in PCM through HDMI, only through optical.
It doesn't make sense to me either. But the fact remains, that turning on variable for analog audio output makes it so I have no sound coming from my stereo. Regular DTV works on variable just fine, and the volume actually changes!
In an attempt to simplify my home theater set-up for my wife, I ran into an interesting problem with volume control.
I have a Vizio E421VO tv with an Xbox 360 and Playstation 3 connected to the tv via HDMI. The tv has an analog audio out via 3.5" jack, which I have running to an old RCA stereo...