As you may have heard, with the Xbox 360 Flash Fall 2006 System Update we are adding support for WMV video playback from new sources. Videos can be streamed from a PC running Windows Media Connect, Windows Media Player 11, or the new Zune client player, and can also be played from Optical Disc and most USB mass storage devices. For all these sources, only the WMV video file format and codecs are supported.

How do I know if a video file will work on the Xbox 360?
Currently only the Windows Media Video (WMV) file format and codecs are supported. If you have a file with a ".wmv" extension, then the odds are pretty good that it will work. Technical details on the types of files we support can be found at the end of this post, but the easiest way to find out if a file will work or not is to just try it. Hopefully after you click play the video will show up on your display, but if the content is not supported you will simply get an "Unplayable Content" message blade from the side of the screen and then be returned to the Video blade.

How do I create videos that will play on my Xbox 360?
Windows Movie Maker, a standard feature of Windows XPSP2, will output WMV video files compatible with the Xbox 360 console. Either use the default settings when you finish a movie and click "Save to my computer," or just make sure that the output video format you select shows the file type as "Windows Media Video (WMV)."
Videos will usually look best when they are closest to the original resolution that they were created with. Try to create video files at least 360 pixels high in vertical resolution in order to minimize content upscaling on the console.

If you decide you want finer control of the output video file format, download a version of Windows Media Encoder (http://www.microsoft.com/windows/windowsmedia/) and then start encoding away. Optimal size and bitrate settings will vary depending on the source material you are encoding. As a general guideline though, 1.5 Mbps is a typical bitrate that should be suitable for most standard definition content, and 8 Mbps is a common bitrate for high definition content.

Can I get more technical details about the kinds of files you support?
- WMV video files with the extension ".wmv" are stored in a generic file container format known as ASF. ASF files can contain many different types of codecs within them. Xbox 360 supports most common WMV video codecs, as seen in the following chart:
Name (FourCC)
Windows Media Video 7 (WMV1)
Windows Media Video 8 (WMV2)
Windows Media Video 9 (WMV3)
Windows Media Video 9 Advanced Profile (WVC1)

- There are some files with ".wmv" extension that may play on a PC, but are unsupported on the Xbox 360 console. Windows Media Screen, Windows Media 9 Image (Photostory), and some older Microsoft codecs are unsupported, as seen in the following chart:
Name (FourCC)
Microsoft MPEG-4 Video Codec V3 (MP43)
Microsoft MPEG-4 Video Codec V2 (MP42)
Microsoft MPEG-4 Video Codec V1 (MP41)
Windows Media Screen V9 (MSS2)
Windows Media Screen V7 (MSS1)
Windows Media Video 9 Image (WMVP)
Windows Media Video 9 Image v2 (WVP2)
ISO MPEG-4 Video V1 (MP4S)

Anamorphic content with nonsquare pixels is currently unsupported on Xbox 360 console, and will be displayed as if the pixels were square. If you want to play such content on your console, it is recommended that you re-encode the content in a square pixel format.

News-Source: Official Team Xbox Blog