I'm sure there are people here familiar with Shoutcast streaming radio capabilities. I am just curious, how do a lot of popular stations input advertisements between songs? Is this done on a playlist level? As in, they literally have mp3s of the commercials placed in between songs?

Yes, this would be the method of advertisements.
There is no way to set the server to play a file or bunch of files between played songs (though this would be a great addition).

I'm sure there are people here familiar with Shoutcast streaming radio capabilities. I am just curious, how do a lot of popular stations input advertisements between songs? Is this done on a playlist level? As in, they literally have mp3s of the commercials placed in between songs?

u can easily do it with a broadcasting application like sam broadcaster or pirate radio.