How does a symphony put on a concert in a virtual world like SL? It's actually quite simple. Like most live SL musical events, the audio is simply streamed in (like an internet radio station) and in this case, live video will be streamed as well. In a sense it's like watching TV on your computer.
In SL it's very difficult (due to syncing issues) to coordinate music in-world. Usually it consists of a short audio clip that's paired with a "pose ball" (which is a device that animates your character). A few instrument makers have built solo instruments with simple interfaces that allow one to enter in melodies (like using a MIDI keyboard). Until the technology develops it is unlikely that we will hear an av *create* music live in SL in the traditional sense. Luckily these issues matter less for more avant-garde sound situations.
Maybe I'll arrange a scratch orchestra performance someday soon....