This is just the tip of the iceberg
Like most of the people who downloaded the first ever music for a dolphin game (well at least to the public), Factor 5 stated that the very same music could be reproduced on an N64 using MusyX technology. Details from IGN64 below...
Considering that Factor 5's MusyX technology is being utilized for Dolphin, it seems safe to assume that the song is not being streamed off CD. Rather, if this is true, it is being rendered through Dolphin's hardware.
Factor 5 comments that the MP3 file is nothing compared to what Dolphin can do. In fact, the company admits that with the latest sound tools, the Thornado music file could probably be executed on Nintendo 64. Dolphin will be able to produce music with roughly three times the amount of audio channels -- all without the need for streaming. This opens up a whole new realm of wonderful sounding on-the-fly music