The Xbox 360 supports DivX and XviD as of today, which may make some of you with big file collections (like us) as giddy as a kid in store with puppies made of candy. We threw our entire collection of movies, TV shows and random clips at it and found that the 360 can play back pretty much anything. Here are some notes.You can play files off of a CD/DVD. This feature wasn't listed on the Xbox Team's website as one of the supported locations for playing back content, but this is fantastic for homes that have wireless networks (or no network at all). In fact, reading off a disc is probably the best way to ensure your movie won't cut out in the middle due to network congestion (unlikely) or someone turning off the computer accidentally (fairly likely).
It supports almost all files. It played back all TV shows we threw at it, including My Name is Earl, 30 Rock, It's Always Sunny in Philadelphia, Battlestar Galactica, and The Venture Bros.. Most of these, and most TV downloaded TV shows, are encoded in XviD format. As for DivX, that's supported back to version 5.0, but it's unlikely that you're going to find any DivX 3 or DivX 4 online, unless you're talking about old files you've saved for a couple years.
AC3 Audio is supported. Nice! AC3 support was added in the Spring Update, but it's nice to see it working with DivX/XviD. Too bad it's not 5.1 though.
It supports Windows Home Server as well. Along with USB drives and WMP11 streaming, you can also stream DivX/XviD from Windows Home Server too. It makes sense to store all your videos on here, since videos are big and WHS has a lot of room. QED.
Video Stretching is kind of weird. The Xbox will try and auto-fit your video to the screen when it starts playing, but it gets confused easily with different video dimensions. You'll want to manually change the playback mode to either letterbox or stretched, depending on what kind of content (widescreen, fullscreen, PAL) you're playing back.
You can skip through a video with the bumpers. RB and LB let you skip forward and back through the movie, but might not be granular enough to get to the place you want to be. You'll have to use the trigger buttons to FF or RW.
It's fast. If your network connection is fast enough (my network is Gigabit Ethernet enabled, which isn't a huge deal since the 360 is only 10/100), the video should play back without a hitch. It's quite nice to be able to play back stuff on your 360, in HD, without having to transcode it into WMV first.
It doesn't work in Windows Media Center Extender. You're going to have to kick out of WMC and back to the dashboard in order to play your videos. Annoying for people who like to switch between live TV and downloaded content.
It's not entirely perfect. It's 90% of the way there, but 5.1 AC3 support, improved handling of different video dimensions, better playback controls and Windows Media Center Extender support will make this the perfect DivX/Xvid implementation.