Lets first understand MBone to understand the need of the encapsulation for IP Multicast -
The MBone (Internet multicast backbone), is the portion of the Internet that supports the forwarding of Internet-based IP multicast traffic. The MBone, used in conjunction with tunneling, provides a way for multicast traffic to travel across portions of the Internet that do not support multicasting.
Tunneling is the encapsulation of a datagram within another datagram. For multicast traffic to traverse the Internet, each IP multicast datagram must be encapsulated within an IP unicast datagram, which is known as IP-in-IP tunneling. An IP-in-IP tunnel is used to forward information between endpoints in an IP internetwork that have differing capabilities, thus acting as a logical link between the endpoints. The encapsulating IP header includes the addresses of the endpoints as the source and destination addresses.
Source: http://technet.microsoft.com/en-us/library/cc759719(v=ws.10).aspx
