Microsoft did create the AVI file but it was back in 1992. Since then
they have moved on and made the WMV file their primary media format
which the 360 does support. It might work with plain AVIs but all of
the AVI files I have are DIVx files.
Just to be clear, AVI is just a file container. Much the same as MKV (Matroska)
Different codecs can be used to encode the video inside of them. WMV can
be used to refer to two things - either the codec itself, or the container
file format (more properly called ASF).
The big reason that Microsoft switch away from AVI and to WMV was for DRM.
They were better able to apply DRM to WMV versus the much more open AVI
standard.
That all being said, a recent Xbox 360 dashboard update did add AVI
support to it, and you should be able to stream DivX and Xvid across your
network and/or play them from burned CDs/DVDs.
Nick
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